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HS1031

H2

1903

\

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PROPERTY OF
JOS. WEIDEL

VU9 RAILWAY EXCHANOe
GHICAOO

J, R. Clayton, Val . Engr. Sys.
Tne AT&SF Ry. Co.

Cblcago 4, lilt
AUG 61986

INST/TUTE OF TRANSPORTATION

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Bj ARTHUR TWINING HADLEY

Railroad Transportation, Its History and Its
Laws. 12**, pp. iv. + 269 . • , |i 50

** Prof. Hadley's treatise is no lets timely than it is valuable.
^ • • Taken as a whole, the work is the result of an investigaf
tion no less wide than exhaustive, and one possible only to a
thoroughly equipped man, familiar with many modem languages."
^TheNation,

" Every page of the work bears witness to the thorough
knowledge of the writer on the subject, and to his equal ability
and practical sound sense in its discussion."— ZiV^a^^ World,

Economics. An Account of the Relations between
Private Welfare and Public Property. 8**, gilt
tops ii^/$2 50

** No higher compliment can be psud this work than to say that
it is hard to determine whether the epithet * judicial ' or * judicious '
would more appropriately characterize it. . . . It will not only
be found invaluable by readers at lazgef but will also at once com-
mand the attention and admiration of economists the world over,"
-^Nation,

** This work will be the standard text-book on political economy
in America. . . . Tlic book will perform a great service to the
whole community by darifjring thought on economic Questions,
and we hope to see it adopted cs a text-book in every American
anivenity/'— JV; K. Commercial A dvtrtistr.

G. P. PUTNAM'S SONS, Nxw york and uondon

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Railroad Transportation

Its History and Its Laws

/%5

VI

ARTHUR TWINING HADLEY

PRBSIDBNT OF YALE UNIVBRSITY ; SOMETIME LABOR COMMISSIONER OF THE

STATE OF CONNECTICUT ; AUTHOR OF ** ECONOMICS : AN ACCOUNT

OF THE RELATIONS BETWEEN PRIVATE PROPERTY AND

PUBLIC WELFARE *'

^'fi/^ARy

SIXTEENTH IMPRESS/ON '^do

AUG

G. P. PUTNAM'S SONS

NEW YORK & LONDON

Sbe ftntchetbocltet ptcM

1903

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COWUGHT BV

O. P. PUTNAM'S SONS
1885

tSbe Itnicfterbocliet f)rcM> Hew fiotk

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PREFACE.

This book deals with those questions of railroad his-
tory and management which have become matters of
public concern. It aims to do two things : first, to pre-
sent clearly the more important facts of American rail-
road business, and explain the principles involved ; second,
to compare the railroad legislation of different countries,
and the results achieved.

The two things need to be viewed in connection with
one another. The attempt to manage railroads without
regard to the demands of public policy, or to legislate
concerning railroads without regard to the necessities of
railroad business, results in disastrous failure. This fact
has been gradually recognized by thoughtful men on both
sides. But it has been hard to get any comprehensive
view of the subject in its different aspects. The brilliant
book of C. F. Adams, Jr., stands almost alone ; and even
this treats of but a few questions among many. The man
who would really study the subject, must seek his material
among hundreds of different arguments and reports;
many of them extremely able, but few of them easy of
access, and still fewer at all complete in themselves.

It was to meet this want that the author first under-
took to deliver a course of lectures on Railroads and the
Social Problems connected with them. Part of the ma-
terial of these lectures is here presented to the public.

One of the pleasantest things in the whole work has been

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JV . PREFACE.

the cordial help which the author has uniformly received
from men, in all positions, to whom he has had occasion
to apply for information. Special acknowledgments are
due to Mr. S. Wright Dunning, of The Railroad Gazette^
for constant suggestions with regard to the work, as well
as for the ready permission to use material which has
appeared, both signed and unsigned, in the columns of his
journal.

New Haven, Conn., Oct. i, 1885.

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CONTENTS.

I. — The Modern Transportation System .
II.— The Growth of United States Internal Com

merce

III. — Railroad Ownership and Railroad Speculation,
IV. — Competition and Combination in Theory .
V. — Competition and Combination in Practice .
VI. — Railroad Charges and Discriminations
VII. — Railroad Legislation in the United States .
VIII.— The English Railroad System .
IX. — English Railroad Legislation
X. — Railroad Policy in France ....
XI. — The Railroad Systems of Central Europe .
XII. — Railroad Legislation in Italy
XIII. — Results of State Railroad Management

Appendix . .

Index

24
40

63

82
100
125
146
163
187
203
219
236
259
267

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RAILROAD TRANSPORTATION
ITS HISTORY AND ITS LAWS.

CHAPTER I.

THE MODERN TRANSPORTATION SYSTEM,

Its importance in history — Growth of the postal service — The telegraph-
Merchant shipping — Substitution of steam for sail — Invention of rail-
roads — Misunderstanding as to their real character and uses — Changes
since 1850 — Consolidation — Railroad extension — Development of busi-
ness — Reduction of rates — ^Widened field for speculation — Growth of
large cities and large establishments — Discrimination — ^Jealousy of rail-
road power — Characteristics of railroad legislation since 1870.

A. de Foville : ** De la Transformation des Moyens de Transport."
Paris, 1880.

E. Sax : ** Die Verkehrsmittel in Volks- und Staatswirthschaft." Vienna.
1878.

F. X. V. Neumann-Spallart : ** Uebersichten der Weltwirthschaft, Jahr-
gang 1881-2." Stuttgart, 1884.

On the fourth of July, 1828, Charles Carroll, last sur-
viving signer of the Declaration of Independence, laid the
first rail of the Baltimore and Ohio Railroad. One man's
life formed the connecting link between the political
revolution of the last century and the industrial revolu-
tion of the present.

The second reaches wider and deeper than the first.
Yet there are few who realize its full importance, or who
seriously try to understand it. A new system of com-

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2 RAILROAD TRANSPORTATION,

mercial and social relations has arisen among us. Small
industries and independent workmen are giving place to
large factories and factory operatives. We no longei^
produce for the home market, but for the world's markets.
A rapidly increasing share of productive wealth is held
by corporations. The men who manage this mass of
corporate capital form the sole connecting link between
investors, workmen, and consumers. The classes become
more and more sharply marked. Conflicts of interest
arise between them — sometimes apparent, sometimes real,
— which result in disastrous struggles or in class legisla-
tion of the worst type. Yet the majority of men seem
indifferent to the real importance of these events. Occa-
sionally they make feeble efforts to resist them. More
often they allow themselves to be hurried on in the gen-
eral movement, without even trying to understand what
it means or whither it is leading.

Of these changes the railroad is at once an instrument
and an example. As a carrier, it furnishes the means
which has made modern business methods possible. As
an organization, it furnishes in itself an extreme type of
those methods. No one symptom, in business or in poli-
tics, marks the direction of national activity so clearly as
does the way in which the transportation system is organ-
ized and controlled.*

This last fact is by no means confined to modem his-
tory. The greatness of ancient Rome had no more char-
acteristic monument than her system of military roads.
With the fall of the Roman Empire the roads fell into
decay; and distant communication on a large scale was
first revived by a league of independent towns, which,
from the thirteenth to the fifteenth century, controlled

* M. M. V. Weber : ** Nationalitat und Eisenbahnpolitik." Vienna, 1876,

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THE MODERN TRANSPORTATION SYSTEM. 3

the commerce of Northern Europe on water and on land
The history of this Hanseatic League, extending from
Norway to Belgium, from London to the heart of Russia,
is one of the most striking illustrations of the political
system of the Middle Ages. With a change of political
system the transportation system changed also. One of
the first steps of Louis XL of France, in his efforts to
create a national power and national life, was to take the
postal service out of the hands of the cities or other feudal
authorities and make it a matter of national administra^
tion. Modern history — the history of nations as such —
may almost be said to have begun at this point.

Two or three centuries later, France obtained a national
system of roads and canals. The idea was largely due to
Colbert, the minister of Louis XIV. It was not executed
in detail till the middle of the last centur>\ Many abuses
grew up in connection with it ; but on the whole it was
probably the soundest and most efficient part of the
French administration. A system of lines of communica-
tion, radiating from Paris, was constructed by skilled
engineers, and placed under the supervision of men of
talent, specially trained for the purpose at the 6cole des
Fonts et Chauss^es. The whole arrangement was further
improved by Napoleon, and has served as a basis for the
present system of railroad supervision.

In no other country was the same completeness of or-
ganization possible. In England there was no such
organization at all. The roads were cared for — and badly
cared for — by local authorities. Through communication
was established, not by government, but by private en-
terprise. Turnpikes were first constructed at the begin-
ning of the last century. The first great English canal
was built in 1760. The next forty years was a period

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4 RAILROAD TRANSPORTATION.

of great activity in canal building ; but it was left to
private enterprise, with little or no government inter-
ference.*

While England was thus far behind in the matter of
land communication, on the sea she took the lead in a
policy of her own. The Navigation Act of 165 1, denying
foreign vessels the right to carry to or from England the
commerce of any country but their own, was in every
sense a national measure. It was a systematic attempt to
advance the shipping interests of England at the expense
of those of other states. It bore the stamp of English
character in every line. By crippling the commerce of
Holland, it gave England her supremacy on the sea. It
was imitated by other nations in the vain hope of produ-
cing similar results. It continued in force for nearly two
centuries; being regarded as the bulwark of England's
maritime power, when really it had ceased to be of any
service to her shipowners, and had become an intolerable
nuisance to her merchants.*

These matters of transportation policy in past centuries
are chiefly important as illustrating the drift of the gen-
eral history of the time. In itself the transportation
business was small. The movement of goods in a year
on all the through routes of the world a century ago
would not equal the movement on a single one of our
trunk-lines of railroad at the present day. Transporta-
tion policy was but a straw showing the direction of the
political wind. To-day all this has changed. Transporta-
tion has not merely become important in itself, it has be-
come a controlling factor which gives shape to each

" Gustay Cohn : ** Untersuchungen ttber die Englische Eisenbahnpolitik."
Leipzig, 1874. Vol. i., pp. ii-i6.

*W. S. Lindsay: ** History of Merchant Shipping." London, 1874-76.
Vol. iii., pp. 53-286.

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THE MODERN TRANSPORTATION SYSTEM. J

man's private business, and to the public policy of every
civilized nation.

All this has grown up within a century; nearly all,
within half a century. The opening of canals, and the
development of river navigation, mark the beginning of
the change : but it was only a beginning. The canal
system of America was fairly well developed fifty years
ago ; that of Europe still more completely so. Yet it is
astonishing to find how little long-distance communication
there had been up to that time. It was not until 1833
that a daily mail was established between London and
Paris. Even after that, there was communication with
the other parts of the continent only twice a week. The
English charge on foreign letters, apart from the ship's
postage and the expense in foreign countries, varied from
twenty-eight to eighty-four cents. The inland communi-
cation was more frequent, but the charges were exorbitant,
averaging about twenty cents per sheet. No wonder that
a vast deal of private letter conveyance was done, in defi-
ance of the government monopoly. In the years 1834-5
the pressure in favor of low rates began to make itself felt.
The movement was headed by Rowland Hill, whose work
on " Postal Reform, its Importance and Practicability " ap-
peared in 1837. His proposal to reduce inland postage
to one-tenth its former figure was so sweeping as to
create a great sensation, and not a little opposition ; but
the idea was carried out in 1840, postage stamps being in-
troduced at the same time. The financial results did not, at
first, meet the more sanguine expectations ; but the so-
cial effects far outweighed any temporary financial loss.

The example thus set by England was soon followed
by other civilized nations. The first changes in the United
States were made in 1845. The previous rates had been

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6 RAILROAD TRANSPORTATION.

from six to twenty-five cents, according to distance. They
were now reduced to five or ten cents; and soon after-
wards (185 1, 1855) in general to three cents. The same
policy was followed throughout Europe at almost the
same time. With lower rates came better service and
better facilities. In the year 185 1 these reforms were
tolerably complete as far as concerned national postage of
the leading countries ; and by a series of postal treaties
they were rapidly extended to international correspond-
ence within Europe itself. In the ocean postal service
the high rates continued much longer. The attempt to
subsidize steamship lines led to an attempt to tax the
letters carried by those steamships. England was thus
for a long time actively opposed to the lowering of
ocean postage rates; the United States did not take
strong ground in its favor until after the abandonment of
the Collins line subsidy in 1858. From that time forward
there was a steady lowering of rates, culminating in the
establishment of the Postal Union in 1874-5, with its
uniform rate of five cents per half ounce between a num-
ber of countries on both sides of the Atlantic. This
Union was more closely organized in 1879; ^^^ ^^ ^^^
gradually come to include the whole civilized world.
The statistics of the Union show that the total number
of letters and packages delivered by mail now amounts to
10,000,000,000 annually.*

In the same year (1837) with the appearance of Row-
land Hill's proposals for cheap postage, the electric tele-
graph' was first patented. Four distinct patents were

* For details, see Neumann-Spallart : ** Uebersichten," 389-398.

' De Foville, pp. 203-205. For detailed statistics on the telegraph see
Neumann-Spallart, 399-413 ; " Tenth Census of the U. S." (1880), vol.
iv., pp. 804-849 (numbers at the bottom of page). The latest authority on
the telegraph in its industrial or political aspect is SchOttle : '* Der Tele-
graph in administrativer und finanzieller Hinsicht." Stuttgart, 1883.

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THE MODERN TRANSPORTATION SYSTEM. /

issued almost simultaneously. The first working line
seems to have been established in England about 1839.
The U. S. Government enabled Prof. Morse to construct
the first American telegraph — between Baltimore and
Washington — in 1844. The attempt W2is made in many
countries of continental Europe to confine the use of the
telegraph to the government, and not allow private indi-
viduals to send messages. But this was too much against
the spirit of the age to be carried out successfully ; and
while the governments retained their monopoly of tele-
graph ownership, they were obliged to give up the attempt
to monopolize its use. The telegraph service of Germany
and Austria dates from 1849; that of France from 185 1.
Telegraphic communication between Europe and America,
which had been held for about a month in 1858, was first
permanently secured in 1865. Technical improvements
and inventions have followed one another in such rapid
succession in recent years that we cannot even enumerate
them ; nor can we give any history of the telephone, the
most important of them all. There are now about 600,000
miles of telegraph line, with at least 1,600,000 miles of
wire ; an increase of some 50 per cent, in ten years. The
total number of messages of all kinds cannot fall far short
of 200,000,000 annually.

Of scarcely less importance has been the development
of merchant shipping. The nominal tonnage of the
world's marine has increased from about 5,000,000 in 1830
to 20,000,000 in 1880* — 300 per cent in fifty years. But
the increase in effective carrying power was far greater
than these figures would indicate. The effectiveness de-

^ These figures, especially for the earlier date, can only be roughly given,
and authorities differ widely. For more careful attempts at computation,
on a somewhat different basis, see Kiaer : " Statistique Internationale de la
Navigation Maritime.'* Christiania, 1881.

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8 RAILROAD TRANSPORTATION.

pends not only upon the tonnage but also upon the
tapidity of movement ; and this was fast increasing. A
part of the increase was due to improvements in build ; a
part to improved methods of handling freight. A part
was due to the opening of new lines of communication,
like the Suez Canal. A part — and by no means a small
one — ^was due to the study of the prevailing winds, first
taken up on a large scale by Lieut. Maury some forty
years ago. It was found that the winds had a certain
regularity even in those parts of the ocean where they
seemed to blow quite irregularly. By taking, not the
shortest course, but a course where the winds are likely to
be favorable, the average duration of the voyage on many
routes was shortened thirty or forty per cent.

But the most radical change was made by the gradual
substitution of steam for sail as a mode of propulsion.'
The practical usefulness of the invention dates from the
early years of the present century.* It was long after it
had been employed on inland waters or in the coasting
trade before it was supposed possible that it could com-
pete with sail on ocean routes. The first efforts of Eng-
land to secure ocean steamship lines were the result of
political rather than business considerations. But what
seemed a hazardous experiment in 1838 was a proved
success in 1850. There was a hard fight beginning be-
tween steam and sail ; each new invention gave steam a
new advantage. The substitution of the screw for the
side-wheel and the introduction of compound engines
economized force and fuel. The attempts to use sailing
vessels with auxiliary screw were not very successful.
The increase in the size of vessels gave steamers a relative

* Lindsay : ** History of Merchant Shipping," vol. iv.

• ** Tenth Census of the U. S.," iv., 649-652.

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THE MODERN TRANSPORTATION SYSTEM. 9

advantage ; for, while it somewhat increased the con*
sumption of fuel, it increased the carrying capacity much
faster. There are now steamships which bum but half an
ounce of coal per ton of cargo per mile. The rather
questionable device of water ballast and the rise of the
" ocean tramp " — the name given to such steamers as
have no regular route, but run wherever and whenever
they can get a cargo — still further tends to drive sailing
vessels out of lines of trade in which they had hitherto
felt themselves secure. The effect is clearly enough seen
in the statistics. Of the world's tonnage in 1870, eleven
per cent, was steam, eighty-nine per cent. sail. In 1880
twenty-five per cent, was steam, seventy-five per cent. sail.
Now a steamer, on account of superior speed, is from
three to five times as efficient as a sailing vessel of the
same size. With an apparent increase of only fifteen per
cent, in tonnage, there has been an actual increase of
from thirty-five to fifty per cent, in carrying power — an
increase with which international trade has more than
kept pace.'

What happened on sea, in the substitution of steam for
sail, was more than paralleled on land in the substitution
of railroads for roads and canals.

The change dates from the beginning of the present
century. In 1801 the first chartered line of rails was laid
— a short horse-railroad from Wandsworth to Croydon, in
the' suburbs of London. Similar lines were built in
almost every succeeding year. In 18 14 it was discovered
that cars could be propelled by the adhesion of a smooth
wheel to a smooth rail. This showed how steam power
could be applied. It only remained to find a practicable

' M. G. Mulhall : " Balance Sheet of the World." London, 1881, Table
10 and remarks.

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lO RAILROAD TRANSPORTATION.

means of generating this power in a locomotive engine.
Two things were necessary for this purpose — sufficient
draft to keep up a hot fire, and a large heating surface in
a small compass on which to apply it. The escape-steam
blast provided the draft. The tubular boiler provided
the heating surface. When George Stephenson combined
the two, the result was the modern railroad locomotive,
complete in its essential features.'

It had required a hard struggle to secure a charter for
the Liverpool and Manchester railroad, so strong was the
opposition of vested interests. Only such a politician as
Huskisson could have done it at all ; and even he had to
spend ;f 70,000 to carry it through. But the success of
this one railroad assured the construction of many others,
not in England only, but elsewhere. The United States
had already made a beginning in railroad construction ;
the work was now actively pushed forward at half a dozen
different points. The Belgian Government was quick to
lay out an admirable railroad system ; and several districts
of Germany were not far behind.

It was not a mere accident of history that France took
no part in this movement. Nor was it simply because
her admirable system of roads and canals made railroads
seem less necessary. It was because France disliked to
build railroads at all until it could be done under a com-
prehensive plan. It was not in the French character to
do things piece-meal. Yet this was exactly what other
nations were doing, and were forced to do, with their first
railroads. Nowhere, except in Belgium, were the lines
systematically arranged. Nowhere was the management
any thing better than a makeshift. They were playing

' W. H. Brown : ** History of the First Locomotives in America." New
Vork, 1871. pp. 49-51.

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THE MODERN TRANSPORTATION SYSTEM,^ II

and experimenting with a new device, of whose uses and
laws they had but a faint idea. They supposed that its
chief use would be the conveyance of passengers, and that
it would be subject to the same laws as the old turnpike
roads. When the first charters were granted in England
and Germany, it was assumed that the company would
own the road-bed, simply as a canal company would own
its canal ; that any man could own cars and run trains,
just as he would own and run canal boats or wagons.
Under this view, the railroad charges were to be nothing
more nor less than a system of tolls. Many railroad
charters contained long schedules of this kind, with
hundreds of different provisions, none of them of any
practical use. These more obvious absurdities have been
gradually abandoned ; but many of the indirect effects of
this idea are still felt in the legislation of the present
day.'

The early railroad engineers overestimated the speed
which could be readily attained. Fifty years ago it was
generally expected that passenger trains would soon run
at rates of from seventy-five to one hundred miles an
hour — a prediction which has as yet remained unfulfilled.
On the other hand, they underestimated the railroad's
capacity for doing work cheaply. It was not supposed
that railroads would ever be able to compete with water
routes in the carriage of freight, except where speedy
delivery was of the first importance. Nor was it at that
time desired that they should do so. The first English
railroad charter contained provisions expressly intended
to prevent such competition. A generation later, in the
State of New York itself, there was a loud popular cry

' Chas. Francis Adams, Jr. : " Railroads and Railroad Questions." New
York, 1878. pp. 89-84. Cohn: "Untersuchungen," chapters i., ii.

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12 RAILROAD TRANSPORTATION.

that the New York Central must be prohibited from
carrying freight in competition with the Erie Canal/
The main field of usefulness of railroads, and the means
by which that field was to be developed, were not merely-
ignored, they were positively shunned.

This period of railroad infancy ended about the year
1850. The crisis of 1847 marked its close in England.
The Revolution of 1848-51 was the dividing line on the
continent of Europe. The land grants of 1850, and the
formation of three trunk lines * from the seaboard to the
interior may be taken as the beginning of the new era in
the United States. It began to be seen and felt that a
steam railroad was something more than an exaggerated
turnpike or horse railroad, and that it had functions and
laws of its own. The changes were : first, the consolida-
tion of old roads ; second, the construction of new ones in
a great variety of conditions ; third, and most important,
the development of traffic by cheap rates and new methods.

I. Consolidation, — The early railroad charters were for
short independent lines. In England they averaged only
about fifteen miles in length. In the year 1847 there were
five thousand miles of railroad open, owned by several
hundred different companies. Twenty-five years later
there were thirteen thousand miles, virtually the whole
of which was in the hands of twelve different companies.
In France, the number of independent systems was re-
duced from thirty-three in 1847 to eleven in 1852, and six
in 1859. If we follow back the history of almost any rail-
road in the United States, we find the same tendency

> Henry V. Poor : ** Manual of Railroads of the United States for 1881."
Introduction, pp. 24-39.

* There had been for ten years previous an all-rail route across New York
State, but its consolidation under one company did not take place till 1853.
The Erie was opened as a through route in 18 51, the Pennsylvania in 1854.

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THE MODERN TRANSPORTATION SYSTEM, I3

illustrated. The line of the New York Central betv/een
the Hudson and Lake Erie alone represents the union of
what was originally sixteen different companies. The
economic laws which govern this movement will form a
subject of subsequent discussion.' Railroad consolidation
has always been regarded by the public with a kind of
vague fear. As long as it was a mere union of connecting
lines into one through route, the advantages to the pub-
lic in speed, accuracy, and good organization have been so
obvious as to silence the fear of corporate power. When
it was a case of the union of competing lines, the advan-
tages to the public have been less obvious, the dangers
apparently greater, and the opposition always louder and
sometimes more effective.

2. Extension. — Consolidation of itself created through
routes and long-distance traffic. Improvements in engi-
neering produced the same results in another way. It
had been at first supposed that railroads could only work
to advantage on level routes ; in general, where good roads
or canals already furnished cheap transportation. It was
now found possible to build mountain railroads; not
merely to supersede existing means of communication,
but to go far beyond them. The first railroad across the
Alps — ^the Semmering from Vienna toward Trieste — ^was
built in 1854. The Brenner Railroad from Munich
to Italy was completed in 1867. The Mt. Cenis, from
Lyons to Turin, with a tunnel seven and a half miles in
length, was opened in 1871 ; the St. Gothard, through
Switzerland, with a nine-mile tunnel under the very heart
of the Alps, in 1882. Other parts of the world had shared
in this progress. The Union and Central Pacific route
was opened in 1869; so many other roads across the

' ■ ■ I I I n il I tw mm^mim^^mmmm

* Chapters iv., v.

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14 RAILROAD TRANSPORTATION,

Rocky Mountains have since been built that we cease to
count them any thing extraordinary. British India is
traversed by railroads in every direction, eleven thousand
miles in all. A railroad across the main chain of the
Andes from Chili to Buenos Ayres is just being com-
pleted. A line across the Ural Mountains and far into
Siberia is in process of construction.

Some of these roads have created international trade
where formerly there was little or no communication.
Others have pushed on in advance of civilization itself,
creating the communities which were to support them.
These roads could not be built expensively; it was a
question between a cheap road or no road at all. In
America the question how to build such roads took care
of itself. Land was cheap ; wood was cheap ; it only
remained to select such a course as would involve the
least outlay for grading, cuttings, or bridges ; put down
sleepers on the ground itself, lay the cheapest rails that
would hold together, and trust to the future for any more
solid construction. In Europe, on the other hand, the
question was made the subject of scientific study. Great
attention was paid to systems of narrow-gauge railroad
construction to be applied in the case of localities with
light traffic, in mountainous districts, or under stress of
military necessity.*

Military and political reasons have had a great deal to
do with the bolder instances of railroad extension. It is
to such reasons that we owed the building of the Union
Pacific. The same thing may be said of all the large
mountain railroads of the Old World. But railroads have

' The engineering literature on the subject is large. From the political
standpoint the most noticeable work is probably *' M. M. v. Weber: Der
Staatliche Einfluss auf die Entwickelung der Eisenbahnen minderer Ord-
nung." Vienna, 1878.

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THE MODERN TRANSPORTATION SYSTEM. 1$

a special use in modem war quite apart from these more
general considerations of political influence. Napoleon is
quoted as saying, that the strength of an army lies in its
legs. Modern improvements have made this saying still
truer to day than it was eighty years ago. The lack of a
few miles of railroad connection in 1859 probably caused
Austria to lose the battles of Solferino and Magenta, and
changed the whole destiny of Italy. The energetic con-
trol and use of every railroad line in 1870 enabled
Germany to put her troops where they were most needed,
and strike those telling blows which virtually decided the
contest in the first few days. One of the most important
lessons of our war was upon the value of railroad communi-
cation at the very front. We learned to destroy it for the
enemy quickly and thoroughly ; to repair or construct it for
ourselves less thoroughly but about as quickly. How this
lesson has been taken to heart is shown by the military
railroads of France in Tunis, of England in Egypt, of
Russia beyond the Caspian. It is seen on a larger scale
in the system of railroads in Prussia, Austria, Russia, or
India ; many of them built not as one would build docks
and canals, but as one must build forts and arsenals.

Under all these influences the railroad mileage of the
world increased from twenty thousand in 1850 to sixty-
six thousand in i860, one hundred and thirty-seven thou-
sand in 1870, two hundred and twenty-five thousand in
1880, and about two hundred and eighty-five thousand at
present. Of the later construction very little was
intended to meet the wants of existing business. Some
of it was due to political considerations ; the remainder —
perhaps two thirds of the whole amount — was intended to
develop new regions and new trade.'

' Neumann-Spallart, pp. 413-430.

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I6 RAILROAD TRANSPORTATION.

3. Business Development. — Rapid as has been the
growth of the railroad mileage, traffic has kept pace with
it. It is estimated that the total number of tons moved
in 1875 was about eight hundred million. At present it
is about twelve hundred million annually, while the pas-
senger movement has increased from fourteen hundred
million to twenty-four hundred million. If we could take
distance as well as quantity into account, the change (for
freight at any rate) would be still greater. To a certain
extent this increased intensity of use of railroads is due to
improvements in engineering ; to a much greater extent
it is the result of improved business methods.

It took some time for railroad authorities to wake up
to a fact which now seems self-evident, namely, that the
profitableness of a railroad as a whole, or of any particular
part of its business, depends quite as much upon the
volume of traffic secured as upon the absolute price
charged. It was further seen that certain lines of business
were of such a character that little or no movement could
be obtained at high rates, while a great deal could be had
if the rates were made low enough. This was found to
be the case with many cheap articles of common use —
above all, with coal ; also with stone, lumber, or even food
products. A reduction of rates on these articles had the
further advantage that it stimulated business in such a
way as to give the railroads more of other articles to carry,
f hus a change which would have been ruinous if applied
to the whole system, was found highly advantageous in
many instances. The principle was not merely applied in
favor of certain classes of business, but in favor of the
long-distance traffic in general. The old system of tolls,
by which certain rates per mile were charged, was abso-
lutely prohibitory to most longdistance traffic. For

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THE MODERl^ TRANSPORTATION SYSTEM. IJ

instance, a rate of three cents per ton per mile, which was
usual thirty years ago, would make it cost about a dollar
a bushel to get wheat from Chicago to New York. To
reduce rates suddenly on all traffic might have proved
ruinous. What they actually did was to reduce rates
where there would be an increase in the volume of business
to make up for it. This marked the abandonment of the
crude idea of tolls, and the substitution of the principle of
making rates to develop business.*

The actual effect of this change was a general reduction
of rates (at almost every point), combined with vastly in-
creased efficiency on the part of the railroad system.'
Unfortunately its action has been unequal, producing fre
quent instances of hardship and of abuse. These abuses
have been sometimes so flagrant, as to call forth serious
attempts to return to the old system of tolls. The system
of making rates to develop business, or of " charging what
the traffic will bear," rightly applied, has been the means
— and we shall find it to be the only possible means — of
securing efficient service and low rates. It has been so
abused and misunderstood by all parties as to have become
a synonym for unchecked extortion — a pretext for char-
ging what the traffic will not bear.

Between 1850 and 1880 rates were reduced on an aver-
age to about one half their former figures, in spite of the
advance in price of labor and of many articles of con-
sumption. A variety of means were made to contribute
to this result. The inventions of Bessemer and others, by
which it became possible to substitute steel rails for iron,
made it profitable for the railroads to carry larger loads

' The change began independently in several countries — ^particularly Eng-
land, Belgium, and the United States ; but it has been carried farther in the
United States than anywhere else.

• Compare chapter vi.

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1 8 RAILROAD TRANSPORTATION.

at a reduction in rates. Improvements in management
increased the effective use of the rolling stock, while the
consumption of fuel and the cost of handling were dimin-
ished. By other changes in railroad economy it became
possible to compete for business of every kind, with the
best canals or with natural water-courses. The railroad
rates of to-day are but a small fraction of the canal charges
of two generations ago ; while in volume of business,
speed, and variety of use there is an inestimable advance.

When the Austrian Government, fifty years ago, re-
garded railroads with dislike as being of a revolutionary
nature, it judged rightly. Improved communication has
played havoc with the European system of Mettemich
and of the Holy Alliance. The diffusion of intelligence
by the post-office and the telegraph has forced the most
conservative authorities to move. The rush of travel has
broken down the passport system. The extension of
trade is forcing us into unity of money, weights, and
measures. It has prevented each nation from settling its
own problems by itself. The land rents which lie at the
base of the social order in England are threatened by
changes in the production of wheat in Dakota or Ne-
braska. Chicago and Calcutta are virtually nearer to one
another to-day, in all matters of business, than London
and Vienna, not to say London and Paris, were a century
ago. The policy of protective tariffs is but a slight obsta-
cle to international trade. Cheapened transportation more
than counteracts it.

We no longer produce for the home market, but for the
world's markets. It is by the world's supply and demand
that prices are made. The development of transportation
has been the main instrument of this change. It has
gone hand in hand with the extension of the credit sys-

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THE MODERN TRANSPORTATION SYSTEM. I9

tern ; each has supplemented the other. The bill of
lading is made to serve the same purpose as the bill of
exchange. The movements of international trade arc
helped forward by telegraphic transfers of money. Trans-
actions which would formerly have taken months to com-
plete are now settled in half an hour. In one sense, time,
money, and risk are spared. Yet the very possibility of
doing all these things so smoothly is the most powerful
stimulant to speculation, and creates more risks than it
annuls.

If it becomes possible for me to sell my goods in mar-
kets five thousand miles distant, it becomes possible for a
hundred other producers in a dozen different parts of the
globe to do the same thing, and compete with me at
almost every point. Of the conditions under which my
competitors are working I can judge but imperfectly ; of
the mistakes which they are likely to make, I can hardly
judge at all. No one producer can judge of the aggre-
gate supply and demand of the world. If a few reckless
producers make a mistake, it means not merely local over-
supply, but over-supply in every market, a fall of prices
everywhere. The ruin of a few drags down all the rest
into cut-throat competition. In this over-production, real
or apparent, railroads are not merely the instruments, but
also the sufferers. The causes which lead to increased
prices and increased production, lead to the multiplication
of railroads beyond all reason. When prices fall, railroad
charges have to be reduced to unremunerative figures in
order to retain any business at all. And railroads have not
the refuge, available in most other lines of business, either
of contracting their capital or of driving their competitors
out of business. A railroad once built is come to stay. It
can neither retire from business voluntarily, nor be forced

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20 RAILROAD TRANSPORTATION,

to do SO by any other competitor. Drive it into bank-
ruptcy, and it only fights the more strongly and reck-
lessly. The railroad is thus at once the instrument and
the extreme sufferer, in the speculation, over-production,
and commercial crises of the present day.

The concentration of industry in large cities is directly
connected with improved transportation. When roads
were the chief means of transportation, the size of cities
was limited by the available supply of food. Railroad
enterprise has so widened these limits by its express
services for milk, fruit, or vegetables, and its cheap long-
distance movement of grain or meat, that there is practi-
cally no such restraint felt. But there has been much more
than a mere removal of barriers. Reference has already
been made to the inequality of railroad rates. This
inequality always operates in favor of large cities. The
reduction in rates was made under the stress of competi-
tion. It was made first and fullest where competition was
sharpest. Even in those countries in Europe where the
state owned many of the railroads, but feeble opposition
was offered to this tendency during the years 1 850-1 872.
In England and the United States it was pursued with
utter recklessness.

The aggregation of business in cities, of itself gives
the large establishment an advantage over the small dealer.
The latter has no longer a local custom of which he is
sure. His personal attention to details begins to count
for less. His competitor's large capital and wide connec-
tion count for more. Too often, mere unscrupulousness
in business may seem to count for most of all. The small
capitalist and the independent workman are crushed out.
The distinction of employers and employed becomes more
sharply drawn. The workman can no longer confidently

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THE MODERN TRANSPORTATION SYSTEM, 21

hope to become the employer of his own labor. It is
these tendencies which give force to the agitation in favor
of socialism. Unfortunately the effect of the policy of
most of our railroads is to intensify these tendencies.
They do not merely favor cities ; they favor individual
producers. The largest or most unscrupulous concern
gets the best rates. Differences are made which are
sufficient to cripple all smaller competitors, and sooner
or later drive them to the wall, and concentrate industry
in a few hands.

What makes things seem worse is that in this matter,
as in speculation, the railroad is not merely an instrument
fostering monopoly ; it is itself an example of the ten-
dency toward monopoly. Railroad consolidation has put
the control of the country's business into the hands of a
few large corporations. The owners may be numerous,
the actual managers are few. It is useless to strive
against this tendency. Consolidation, lowers rates and
makes enlightened economy possible. It usually lessens
the specific abuses of power. But the power itself is
vastly increased ; while the owners are at the same time
removed from all apparent contact or sympathy with the
communities whom they serve. Serious conflicts of in-
terests concerning a turnpike or bridge were almost
impossible, because those who owned them and those
who used them were to a large extent the same, or, at
any rate, came in personal contact. But where one set of
men own a railroad and another set of men use it, the two
only coming in contact through the medium of the rail-
road management, we have a state of things corresponding
to the "absenteeism" of Irish landlords, and involving
conflicts or dangers of the same kind.'

* Iowa Railroad Commissioners' Report, 1884, pp. 5, 6.

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22 RAILROAD TRANSPORTATION.

This condition of things became obvious about 1870 ;
and it is against these evils and dangers that subsequent
legislation has been almost entirely directed. The years
1870-3 are marked by a change in the aims of railroad
legislation, more obvious perhaps than the change in
principles of railroad management twenty years earlier.
A noticeable thing about the changes of legislative aim
was the suddenness with which they made themselves
felt all over the world. Hitherto the object had been to
secure rapid increase of railroad facilities. With this end
in view England allowed the utmost freedom from restric-
tion ; the United States granted almost reckless subsi-
dies of land, or guaranteed bonds ; on the continent of
Europe some states gave direct pecuniary assistance to
private companies, other states built railroads themselves.
The main object was support rather than control. The
most they feared was that charges in general might be too
high, and this they sometimes sought to prevent by law.
That the community might be injured by the reduction
of some charges more than others, scarcely entered the
minds of the majority of legislators and statesmen. The
very worst forms of discrimination were given by state
railroads themselves, apparently without suspicion of
harm.

The reaction was sudden and widespread. In the years
immediately following 1872, the Granger movement did
its work in the United States ; the Railway Commission
was established in England; Belgium and Prussia de-
termined to change from a mixed system to a system of
state ownership pure and simple ; France and Italy began
a policy — eventually unsuccessful — of state purchase and
management. The general object was the same in every
case. Hitherto legislation had been conceived from the

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THE MODERN TRANSPORTATION SYSTEM. 2$

standpoint of the investor — whether that investor was a
private company or the state itself, mattered little. Hence-
forward things were looked at from the standpoint of the
shipper, and especially of those shippers who under the
old system were being driven to the wall.

It can hardly be doubted that the reaction was a health-
ful one in itself. It is still more certain that it was often
carried to an unfortunate extreme. It is safe to say that
a large part of the railroad legislation of the last twelve
years could never be carried out at all, and that a large
part of the remainder would do more harm than good to
all concerned. The attempt to legislate for the shippers
without regard to the railroads is as much of a mistake as
the attempt to legislate for the railroads without regard
to the shippers. To reconcile these two interests — ap-
parently conflicting and yet mutually dependent upon
one another — is one of the most serious problems of
modern business or modem politics.

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CHAPTER 11.

THE GROWTH OF UNITED STATES INTERNAL COMMERCE.

Badness of early means of communication — Constraction of turnpike road^^
National aid to internal improvements — The Cumberland road — Water
routes — The Erie Canal — Other canals — First experiments in railroad
building — The Baltimore and Ohio — Railroads about Philadelphia ; in
the South ; in New York ; in Massachusetts — Development of railroads
in New England 1 840-1 850 ; in the Central States 1850-56— Land-
grant roads before and after the war — Successive periods of speculative
railroad development — Different aspects of railroad history.

Tenth Census of the United States, 1880, vol. iv.

Introduction to Poor's ** Manual of Railroads of the U. S./' 1881.

M. Chevalier : " Histoire et Description des Voies de Communication en
Amerique.*' 3 vols. Paris, 1840. This was an excellent work in its time.
An American authority of about the same date is H. S. Tanner : " Canals
and Railroads of the United States.''

P. F. Kupka : " Die Verkehrsmittel in den Vereinigten Staaten von
Nordamerika." Leipzig, 1883. A mere compilation, but containing much
good material.

One hundred years ago the United States had no
system of transportation. Except on natural water-
courses it had very little transportation of any kind.
The roads were built by local authorities for local pur-
poses — and badly built at that. Wagon conveyance
was slow and expensive. It took a week to go from
Boston to New York by stage, and nearly three weeks
to reach Charleston. Although this was the most fre-
quented route, there was only a tri-weekly mail at best.
The postal service was irregular and unsafe. Passenger
journeys were attended with discomfort, and not infre-

2d

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UNITED STATES INTERNAL COMMERCE, 2$

quently with danger.* Long-distance freight movement
was absolutely impossible. The charge for hauling a
cord of wood twenty miles was three dollars. For haul-
ing a barrel of flour one hundred and fifty miles it was
five dollars. Either of these charges was sufficient to
double the price of the article and set a practical limit to
its conveyance. Salt, which cost one cent a pound at the
shore, would sometimes cost six cents a pound three
hundred miles inland, the difference representing the bare
cost of transportation.' It was on these cheap articles of
common use that the charge bore most heavily. It
forced every community to live within itself. To what
extremes it was carried is shown by the whiskey insurrec-
tion of 1798. The settlers of Western Pennsylvania had
no manufactures of their own. They depended upon the
East for all such supplies, and could only pay for them by
the produce of their farms. Grain in its natural state
was so bulky that the cost of transporting it across the
Alleghanies was simply prohibitory. Distilled into
whiskey, its bulk was far less in proportion to its value,
and the cost of transportation correspondingly less.
The tax upon whiskey was to them a tax upon their sole
exchangeable product, and threatened to deprive them of
all commerce with the outside world. Had there been no
improvement in the means of transportation, this piece
of history must have repeated itself.

Three successive improvements were introduced in the
next generation : turnpikes, canals, and railroads.

Turnpike roads marked an advance, not merely be-
cause they were better built, but because they were built
to accommodate through traffic. The early roads had

» MacMaster : ** History of the People of the United States," i., 52-68.
* "American State Papers," vol. xx., p. 919.

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26 RAILROAD TRANSPORTATION,

been administered by local authorities — the townships in
New England, the counties elsewhere. The system was
taken from England. But in England it had broken
down a century and a half ago, and had been supple-
mented by a system of " turnpike trusts " — that is, the
trustees were empowered to borrow money to build such
roads, and were empowered to charge such tolls as would
suffice to pay the interest on the investment, and gradu-
ally to pay off the principal also.* In other words they
were built by bonds without stock. In America they
were usually built by stock without bonds — that is, turn-
pike companies took the place of turnpike trusts, and no
attempt was made to pay up the principal. This was on
the whole an improvement on the English system.

The first American turnpike was built in 1790. The
system developed first in Pennsylvania, then in New York
and Southern New England. South of the Potomac it
took practically no root. Oa the whole the State of New
York seems to have carried out the system most com-
pletely. Several of the States — notably Pennsylvania,
and later, Kentucky — gave subsidies to turnpikes.' Up to
1822 Pennsylvania had paid nearly two million dollars, or
over one thousand dollars a mile in this way — about one
third of the total cost.

On the whole these roads seem to have paid a fair re-
turn on the investment, and to have given reasonable
satisfaction to the public. In spite of rather high tolls,
they so reduced wear and fatigue of movement, as to
cheapen transportation, in many cases nearly fifty per
cent.

The subject of national aid to roads wa« first vigorously

' Edinburgh Review^ April, 1864.
' Knpka, pp. 6-8.

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UNITED STATES INTERNAL COMMERCE, 27

taken up by Gallatin in 1808, and again by Calhoun in
18 18.' It was argued by Gallatin that the money spent
on roads would be far more than saved in transportation
expenses ; so that if you put a moderate duty on im-
ported goods and spent this revenue on roads, the cheap-
ened transportation would lessen the average price of
goods more than the tariff would raise it. Gallatin, who
was Secretary of the Treasury at the time, put the whole
matter on economic grounds ; Calhoun, ten years later,
took up the matter as Secretary of War, and argued the
subject on the grounds of military strength. But the
actual decision of the question was based on political
grounds rather than on economic or military ones ; and
in this aspect it was taken up by the party opposed to
Gallatin and Calhoun. There were three reasons for the
Whig support of a policy of national aid to internal im-
provements : first, it tended to bind the country together ;
second, it increased the constitutional functions of the
United States ; third, it seemed to furnish additional
reasons for a high tariflf. The second was the main point
contended for. President Monroe, in 1822, vetoed a per-
fectly unobjectionable, and indeed unimportant, bill for
repairs, simply to assert his opposition to the constitu-.
tional principle involved ; but he afterwards changed his
mind on this very point.

Gallatin's original plan contemplated an expenditure
of from sixteen to twenty million dollars. He proposed-
first, a line of road parallel to the coast, extending from
Maine to Georgia; second, a system of lines — road or
canal — connecting the navigable waters of the coast with
those of the Mississippi valley ; third, three long roads
radiating from Washington, leading to Detroit, St. Louis,

* " Amer, State Papers," xx., 724-921 ; xxi., 533,

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28 RAILROAD TRANSPORTATION.

and New Orleans. Needless to say no such plan was car-
ried out. Numbers of bills for national aid to roads were
introduced, and some of them were passed ; but they were
mere individual pieces of work, forming no part of any
general system. There was a great deal of talk, and very
little direct action. President Jackson's opposition at the
critical point was too strong to be overcome.*

The one really important tangible result of all this
agitation was the Cumberland Road — the " National
Pike " from Washington to the Mississippi River. The
original bills (1806-8) provided for a road from Cumber-
land to Brownsville, furnishing direct and easy communica-
tion between Washington and Wheeling. In the course
of the next twenty years provision was made for succes-
sive extension to Columbus, Vandalia, and Jefferson City.
The last section was never completed. The total expendi-
ture up to 1837 was four million three hundred thousand
dollars.'

The road system as a matter of national importance is
a thing of the past. The system of internal water-routes
is a thing of the present in more senses than one. When
no longer used, its influence is still felt, because it has laid
down the lines of the country's development.

The stream of emigration flowed from the Hudson, the
Susquehanna, or the Potomac, toward the great lakes on
the one hand, or the Ohio and the Mississippi valley on

'The constitutional point was evaded by a distribution of the surplus
among the States. A great deal of United States money was thus actually
spent on internal improvements. For the broader political aspects of the
question, see Alexander Johnston's article ** Internal Improvements," in
Lalor's ** Cyclopedia of Political Economy," Chicago, 1881-84. For details,
see £. G. Bourne's careful investigation of the " History of the Surplus Reve-
nue of 1837." New York, 1885.

' H. R. Reports, 1836-37, iii., 850. For a description of travel on this
loute, see Harper's Magazine, Nov., 1879.

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UNITED STATES INTERNAL COMMERCE, 29

the Other. The southwestern movement was at first more
important than the northwestern. Pittsburg and Cincin-
nati, the two main points of transhipment on this route,
had become important business centres, while Buffalo and
Cleveland were the merest frontier settlements. Of this
southwest movement, Philadelphia was the natural start-
ing-point. After the beginning of the present century,
the road from Philadelphia to Pittsburg was fairly good.
The construction of the National Road farther south does
not seem to have seriously threatened Philadelphia's ad-
vantage of position.

The change came from another quarter, with the sub-
stitution of canals for roads. The advantage was now to
lie not with the short route, but with the level route.
And the level route ran through New York State. From
Alabama to New York the chain of the AUeghanies is all
but unbroken. In New York on the line of the Erie
Canal it is almost completely broken.

The first man who really foresaw the future of canal
communication was George Washington. Even before
the Revolution he called attention to the possibilities of a
canal westward from the Hudson; although his main
efforts, both then and afterward, were directed toward
the establishment of communication on a line much far-
ther south, from the Chesapeake to the Ohio. It was at
first supposed that the canal would run to Lake Ontario
instead of Lake Erie. A company with this object in
view was formed in 1792. It did some rather ineffective
work and then became bankrupt. In 1808 the State
bought out whatever remained of this company; in 1810
the Erie Canal commission was appointed with De Witt
Clinton at its head. An effort was made to secure na-
tional aid ; but Madison was unfavorable to the project,

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30 RAILROAD TRANSPORTATION.

and the War of 1812, for the time being, put a stop toi all
action. At the close of this war New York wisely de-
cided to go on with her own resources, without asking
national aid. Clinton was the life of the whole move-
ment. His " Appeal *' was published in 18 16. Work was
begun July 4, 18 17. The middle section was completed
in 1819; the Champlain branch in 1820; the eastern
section in 1822. The whole was finished in 1825.' The
cost had been five million seven hundred thousand dollars.
Probably no one event in the history of the United
States was hailed with such universal rejoicing. And the
usefulness of the canal more than justified expectations.
Wherever it met a natural water-course, a city grew up
rapidly — ^witness the rise of Syracuse, Rochester, and Buf-
falo. The receipts from canal tolls, $762,000 in 1826, had
nearly doubled in 1833. A reduction in rates of about
forty per cent, in 1834 so increased business that the total
receipts continued to grow almost as rapidly as before.
In 1836 arrangements were made for deepening and widen-
ing the canal in such a way that the transportation itself
was cheapened. In spite of constant reductions in rates,
the canal fund grew so rapidly, that in 1845 the managers of
this fund were buying up their bonds at twenty per cent,
premium. In 1852-3 the tolls per ton were only about one
third their original figures ; the revenue was over three mil-
lion dollars in each year. From that time forward begins
the history of contests between canal and railroad. The use
of the canal continued to increase ; its receipts at one time
also increased largely ; but its commercial power slowly
diminished. From 1853 to 1859 there was a fight for
supremacy between canal and railroad. For twelve years
more there was a contest for profits. Then it became a

* " Tenth Census/' iv., 731, 732.

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UNITED STATES INTERNAL COMMERCE, 3I

question whether the canal could pay expenses of main-
tenance ; a question which was finally decided in the nega^
tive."

The construction of the Erie Canal reduced transpor-
tation charges to little over one tenth their former figures.
Branches were built in rapid succession. The low rates
enabled it to compete for the traffic of the Ohio River
valley. Two canals connecting Lake Erie with the Ohio
were built in the years 1825-38, one starting from Cleve-
land, the other from Toledo.

Apart from the Erie Canal and its connections, the first
canals were those for coal transportation. Some were
built in Pennsylvania as early as 1813. The Lehigh Coal
and Navigation Company began its activity in 181 8-21.
The Delaware and Hudson Canal dates from 1826. The
Morris Canal was begun about the same time. More
general activity was first called forth in the years 1830-37.
The Pennsylvania system of public works established a
" composite route " of canal, railroad, and stationary-engine
service, which did useful work in its time, though quite
unable to compete with modern railroads. The canals of
Virginia were unsuccessful; those of Indiana flagrantly
so. Some of the worst of these works were more or less
directly encouraged by subsidies from the United States.*

The crisis of 1837 P^^ 21 complete stop to speculative
canal building. For the time being it was impossible to
continue these works at all ; and when the country had in
some measure recovered, it was felt, in the first place, that

' See chapter vi. For details see successive N. Y. State reports of the
Auditor of the Canal Department, the State Engineer, and special com-
missions.

* Besides the distribution of the surplus (see Bourne, * ' History of the
Surplus Revenue of 1837 "), there were 4,000,000 acres of land granted to
canals or in aid of canal construction.

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32 RAILROAD TRANSPORTATION.

these systems of public works had done more harm than
good ; and, secondly, that the chief means of internal
communication was not to be water, but rail. Some local
canals, chiefly coal canals, continued to be of service to
local traffic. Two great systems of water communication —
the Lakes and Erie Canal on the north, the Mississippi
River on the south — have continued to wage a more or
less equal contest with the great railroad systems of. the
present day. The history of these contests belongs to a
subsequent chapter.

Before the canal mania reached its height, railroad
building had begun almost simultaneously at half a dozen
different points. The idea took root most suddenly.
There had been no such previous series of experiments
with horse railroads as in England. The Quincy tram-
road* (1827), by which stone was hauled for the Bunker
Hill Monument, is hardly important enough to be noted
as an exception. Of somewhat greater importance were
the Mauch Chunk Railroad, completed in the autumn of

1827, and the Carbondale and Honesdale, built by the
Delaware and Hudson Canal Company, and opened in

1828. The first locomotive seen in America was imported
from England for the use of this road.* But these roads,
and one or two others immediately following them, were
built for special purposes rather than for general public
use.

The honor of taking the lead in the construction of a
full-fledged railroad may fairly be given to Maryland.
The Baltimore and Ohio was really the pioneer railroad.
It was chartered in 1827 and begun in 1828. The first

* Adams : ** Railroads," pp. 37-39-

' It did not serve its purpose. W. H. Brown : " Hist, of First Locomo
* tives," pp. 74-92.

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UNITED STATES INTERNAL COMMERCE. 33

section, fifteen miles in length, was opened in the begin-
ning of the year 1830. Horse-power and even sails were
at first tried as means of propulsion. It was not until the
latter part of 1831 that steam was definitely chosen for
the motive power.

The early railroads were like modern street railroads in
their construction. That is to say, instead of having trans-
verse sleepers, they were laid upon heavy wooden beams or
sills, placed lengthwise. These beams were the real sup-
porting power ; the rail was simply a flat strip of iron, to
protect the underlying wood from wear. The first locomo-
tives, imported from England, were found too heavy to be
borne by a road thus constructed. There was also much
delay in their arrival. America almost immediately began
to manufacture her own locomotives ; the West Point
Foundry Works taking the lead in this matter.*

By the close of the year 1835, the Baltimore and Ohio
with the Washington branch had attained a length of
one hundred and fifteen miles. Pennsylvania had been in
some respects still more active, her railroads, chiefly coal
roads, having attained the highly respectable length of
about two hundred miles* — one quarter of the whole
mileage of the United States at the time. South Caro-
lina had one hundred and thirty-seven miles open for
traffic ; Massachusetts, New York, and New Jersey, not
far from one hundred miles each. The remaining roads
were chiefly in Virginia. Railroad extension was not seri-
ously checked by the crisis of 1837. In one sense it may
have been helped rather than hindered ; for as the building
of new canals was given up, the necessity of new railroads
was all the more apparent.

* Brown : ** Locomotives," 145, 159 fif.
Including some private railroads not mentioned in the United States
Census returns.

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34 RAILROAD TRANSPORTATION,

The most rapid growth centred around Philadelphia.
To the northwest was a system of coal roads. The first of
them were mere private lines connecting mining properties
with points of shipment by water. In 1833 the Phila-
delphia and Reading Railroad was chartered ; it was opened
in 1838. Farther to the south, directly west of Phila-
delphia, was a line of State railroad opened in 1834. This
was part of the composite route already mentioned. The
Pennsylvania Railroad itself was not chartered till 1846.
The west end of the Camden and Amboy route Avas
opened as early as 1832-34. Regular communication
with New York was established in 1839. A year before
this the Philadelphia, Wilmington, and Baltimore Rail-
road, chartered in 183 1-2, had been opened to Balti-
more.*

The Baltimore and Ohio advanced but slowly after 1835.
More activity was displayed farther South. By the year
1840 there seems to have been a continuous line of rail
open from Fredericksburg via Richmond to Wilmington.
The first section built — that between Petersburg and
Weldon, thirty-one years later the object of such hard
fighting, — was opened in 1833. South Carolina had been
still more enterprising. The Charleston and Hamburg
Railroad, one hundred and thirty-seven miles in length,
was chartered in 1829. When opened in 1833 it was the
longest line of railroad under one management in the world.
A number of branches were built in the years succeeding
1840; while Georgia was developing a well-planned system
of railroads under State ownership. State aid in various
forms was quite prevalent in the South at this time ; the

' These and subsequent figures are obtained by a comparison between the
historical matter in Poor's ** Manual" and *' History" (New York, 1860X
and the returns in the Tenth Census, iv., 301-387 (bottom figures).

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UNITED STATES INTERNAL COMMERCE, 35

policy had been stimulated if not started by the distribu*
tion of the surplus in the United States Treasury. In
Georgia and South Carolina it was done with profit and
success. Elsewhere it was not so well applied. '

The earliest New York railroads were built near Albany.
The Mohawk and Hudson (Albany and Schenectady) was
opened in 1831 ; the Saratoga and Schenectady in 1832;
the Rensselaer and Saratoga in 1835. The New York
Central route was opened to Utica in 1836, and to Buffalo,
by a somewhat devious line, in 1842, though the consoli-
dation of the different sections did not take place till
eleven years afterward. Meantime the Harlem Railroad
had been opened, and many other roads were well under
construction, notably the Erie, which had received liberal
assistance from the State. The main line of the Erie
was, however, not opened through its whole length till 185 1,

Three Massachusetts railroads from Boston toward
Providence, Worcester, and Lowell respectively, were
opened almost simultaneously in 1835.' The whole line
of the Boston and Albany was completed in 1842. This
railroad has the distinction of being the first road operated
as an important through route, and not merely supported
by local traffic. It was not the only instance of continu-
ous railroad connection. There was already an almost
continuous line from New York to North Carolina. A
rail connection from Albany to Buffalo was on the point
of completion. Bui each of these was simply a succes-
sion of local lines mzmaged for local interests, while the
Boston and Albany was built with some conscious idea,
though an imperfect one, of the work that it was to do in
the future.

' Bourne : ** History," chapters vi-xi.
'Adams : ** Railroads/' pp. 52-79.

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36 RAILROAD TRANSPORTATION.

The years 1840-1850 formed a period of rapid railroad
construction in New England — more rapid than it was in
any other section of the country during that decade,
and more rapid than it has been in New England
during any subsequent decade. If we look at the rail-
road map of the United States in the year 1850, we find
that the New England system has developed its main
outlines ; that the Middle and South Atlantic States have
seized the idea of their lines of development, but have not
as yet carried it out, while the States of the Mississippi
valley are just making their first experiments in railroad
construction. In Ohio, part of the Cincinnati, Sandusky,
and Cleveland had been built about 1837. But it had for
a long time stood alone. It was not until 1848 that
through rail communication, by any route whatever, 'was
secured from Cincinnati to the lakes.

After the year 1850, railroad construction in New Eng-
land diminished, while in other parts of the country it
increased rapidly. The Middle and South Atlantic States
in the next seven years filled out the skeleton of railroads
which they had previously possessed. The group of
States east of the Mississippi in the same period laid
down the main lines of its subsequent development. The
Cleveland, Columbus, and Cincinnati line was opened in
1851 ; the Cleveland and Pittsburg in 1852. In the same
year the Michigan Central and Michigan Southern lines
were both opened. The connecting link between Cleve-
land and Toledo was opened in the next year, furnishing
through rail communication to Chicago. In 1854 this was
extended westward as far as the Mississippi via the Chi-
cago and Rock Island. The Chicago and Galena, the
nucleus of the Northwestern system, was opened in 1855,
followed in quick succession by the Chicago and Alton ;

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UNITED STATES INTERNAL COMMERCE. Z7

Chicago, Burlington, and Quincy; and Illinois Central.
The Ohio and Mississippi, from Cincinnati to St. Louis,
was opened about the same time. The first line to reach
the Missouri was the Hannibal and St. Joseph in 1858.

The rapid extension of railroads in the West and South
at that time was favored by the policy of land grants.'
The Illinois Central was the first railroad aided in this
way, although such grants in favor of roads and canals
had not been uncommon in the time preceding the crisis
of 1837. The Illinois Central scheme was first proposed
as far back as 1836; but it was not until 1850-51 that it
received its land grant ; similar grants being at the same
time made to Mississippi and Alabama in behalf of the
Mobile and Ohio Railroad. The example was followed
only too speedily in other States; in 1852 in Missouri, in
1853 ^^ Arkansas, in 1856 in Michigan, Wisconsin, Iowa
on the one hand, in Florida and Louisiana (besides
additional grants in Alabama and Mississippi) on the
other. The sectional interests of North and South were
played off against one another in this scramble for spoils.
Eight million acres were granted under Fillmore, nineteen
million under Pierce.

The crisis of 1857 P^^ ^m effective stop to new railroads,
especially in the West ; and land-grant projects ceased at
the same time. The war then stopped railroad building
still more completely. But instead of stopping land
grants, it gave them a new field and a wider scope. Before
the war these grants, with unimportant exceptions, had
been made to the States and by them to the railroads.
Now began a system of direct grants of territorial lands
on a scale hitherto unknown. A railroad to California

' Forty-sixth Cong., 3d Sess., H. R. Ex. Doc., 47, part iv. (Report of the
Land Commission).

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38 RAILROAD TRANSPORTATION.

was a political necessity, to be obtained at almost any
price. The Union ' and Central Pacific railroads received
what was virtually intended as a money subsidy of over
twenty-five thousand dollars a mile, and land grants aggre-
gating over thirty million acres. The Northern Pacific
failed to get an expected money subsidy, but received in-
stead, just before the close of the war, a double allowance
of land — forty-eight million acres in all. With the restora-
tion of peace, the urgent political necessity ceased, but
not the grants of land. New grants were made in the
Northwest, on a scale exceeding that of ten years before.
In the South the forfeited grants were renewed, and new
ones added. In the extreme Southwest new routes to
the Pacific were richly endowed. Where gifts of lands
were impossible or insufficient, towns and counties, in
East and West alike, vied with one another in subscribing
to the securities of new railroads. For the upper Missis-
sippi valley in particular the years 1868-72 were the years
of rapid railroad development

The causes which led to the crisis of 1873 and the
depression which followed it, the speculation of the years
1880-82, and the crisis of 1884, must be treated elsewhere.'
Railroad extension in the five years 1874-78 was confined
within as narrow limits as possible. In 1879 ^^ began to
revive ; and the four succeeding years did for the South-
western States and for the Rocky Mountain region what
the years 1869-72 did for the upper Mississippi valley.
The increase in these groups during fpur years was 126
and 168 per cent, respectively ; while in the country east
of the Mississippi it was only twenty-four per cent.*

' On the history of the Union Pacific Railroad at this period, see J. R
Crawford : ** The Credit Mobilier of America." Boston, 1880.
■ Chapter iii.
* For detailed history see Railroad Gazette^ 1884* pp* 568, 586.

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UNITED STATES INTERNAL COMMERCE. 39

These years will undoubtedly be remembered as the
period of the building of the great trans-continental
routes, which had been chartered in the earlier period of
speculation, but, with the exception of the Central Pacific,
had been forced to await the second wave of speculation
before they could be completed.

The mere external history is but the smallest part of
any account of railroad development in the United States.
The internal history of railroads, their organization and
management, presents problems of far deeper interest and
importance. There are distinct questions aflFecting the
relations of railroads to their owners, to one another, to
their patrons, and to the government.* They have been
rapidly developing side by side, in one sense independent,
in another sense closely connected. They involve some
of the most serious problems of modem industrial life.
To understand the relations of railroads to their owners,
we must study the growth of corporations, the modern
forms of speculation, the history of commercial crises.
In the relations of railroads to one another and their
patrons, there are involved not merely questions of trade
geography, but questions of industrial principle, of com-
petition and combination, of monopoly and its effects.
And finally, in the relation of railroads to the government,
there are political questions involved which have already
become important, and which are destined to be of far
greater importance in the immediate future.

1 In this enumeration we have omitted an equally important class of ques-
tions, which lies outside of the scope of this book — the relations of railroads
to their employees, which are barely touched upon in chapter vii. To treat
them with the thoroughness which they deserve would require a book by
itself.

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CHAPTER III.
RAILROAD OWNERSHIP AND RAILROAD SPECULATION.

DistinctiTe features of railroad business — Corporate ownership— Its present
extent — Past history — Good and evil connected with it — Speculation —
Commercial crises — Events preceding the crisis of 1884 — Speculative
railroad building and its results — ^Attempts to control it — Railroad
accounts — ^The income account and the general balance sheet — Diffi-
culty of separating maintenance from construction — How far railroad
reports can be serviceable to the investors.

Until about 1850, it was assumed that railroad business
was subject to the same laws as any other business, and
in particular to the so-called law of competition, by whose
free action rates would be brought down to cost of service.
It was gradually seen that this assumption was not strictly
true; that in many instances it was very far from the
truth.

A railroad differs from many other business enter-
prises, in the existence of a large permanent investment,
which can be used for one narrowly defined purpose, and
for no other. The capital, once invested, must remain.
It is worth little for any other purpose than the one in
question. A railroad cannot contract its capital merely
because it does not pay ; nor can it be paralleled at short
notice when it happens to pay remarkably well. In these
respects it differs quite sharply from a bank or store ; and,
to a certain extent, from a factory. The diflferent lines of
business — ^bank, store, factory, railroad — form a series, at
one end of which we have an elastic business capital,

40

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RAILROAD OWNERSHIP AND SPECULATION. 4I

which can be readily expanded or contracted, while at
the other end we have a large permanent investment of
*' fixed " capital, which cannot thus adapt itself to the
wants of trade. This is why it is so often said that the
ordinary laws of political economy do not operate in the
case of railroads,* The early political economists were
for the most part men who had made a special study of
banking business. David Ricardo, the man who did more
than any one else to give English political economy its
present shape, was himself by profession a banker. He
was thus led to treat capital as something not fixed, but
freely circulating, which could be at once withdrawn from
a business when it became unprofitable. In the case of a
factory this is by no means true ; in the case of a railroad
it is absolutely untrue.

This large permanent investment necessarily affects the
relations of a railroad to its owners, to its users, and to
the law. It is owned, almost of necessity, by a corpora-
tion. As concerns the users, it is almost necessarily a
monopoly. Very few points have the benefit of more
than one line of road ; even at these points it is often
easy to come to an agreement. In all these cases, com-
petition is not directly felt. When a railroad makes arbi-
trary rates, whether justified or not, there is no appeal
to any controlling influence. The attempt is therefore
constantly made to bring the railrgads under the authority
of special legislation. There is no lack of gfrounds on
which to base such special action. Corporate existence in
itself renders a certain amount of legal control necessary.
Common carriers have from time immemorial been made
subject to special responsibility. When a single carrier, or
a very few of them, have a virtual monopoly of the whole
*• Railroads/' pTsZ """ '

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42 RAILROAD TRANSPORTATION.

business, this responsibility needs to be still more strictly
enforced. This was the doctrine of the United States
Supreme Court in the Granger cases, in which the re-
served police power of the State was so strongly asserted.*
The railroads themselves recognize their peculiar position
under the law, in claiming to exercise the right of eminent
domain to take land without the owner's consent. If they
get the benefit of their character as a " public use," they
must accept the drawbacks which that character involves.

Finally, the chief practical reason why so much special
legislation is directed against railroads, is that we are
dealing with a new business, without the benefit of estab-
lished precedents in its favor. The public is jealous of
the railroad power. It will not allow it to manage its
business without interference, because it is afraid that it
will gfrow so strong that all interference will be impossible.
The public sees no limit to the growing power of corpo-
rations, and it regards this growth with a kind of vague
fear. This fear is none the less potent because men are
at a loss to tell exactly what they are afraid of. It gives
rise to much wild talk, and some ill-judged legislation.

These manifestations drive some men to the opposite
extreme. Because the fear is vague, they insist that it
is groundless. Because the talk is wild, they insist that
it is much ado about nothing. Because the legislation is
ill-judged, they insist that no legislation is needed.

Either extreme is bad. It is not well to be frightened
at the growth of corporate power ; but it is not well to
shut our eyes to the plain fact of the case. Not far from
one quarter of the wealth of the United States is held by
trading corporations. It is not improbable that half the
permanent business investment of the country is owned

* Munn vs, Illinois, 94 U. S., 113.

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RAILROAD OWNERSHIP AND SPECULATION. 43

in this way.* It is certain that, not in the United States
only, but in the whole civilized world, corporate property
is increasing many times faster than other forms oi
wealth.* It is safe to say that, amid the many important
business changes of the present century, this sudden
growth of corporations is the most important.

So rapid has been the change that men's thoughts have
been hardly able to adapt themselves to it ; still less has
the law been able to keep pace with it. The change has
brought evils and dangers, previously unknown, and even
now imperfectly understood. Against these dangers, old
safeguards have proved useless ; new legislation, based on
a merely superficial view of the facts, has proved worse
than useless. If our remedies are to be of any avail, they
must be based on a thorough understanding of the evils
against which they are directed. To understand the evils,
we must understand the character of the system, and the
causes which have led to its growth.

The distinctive feature of the modem trading corpora-
tion is the limited liability of its members.

' Using the words "permanent investment " in a somewhat narrow sense,
to exclude the value of land itself — which though a permanent investment
on the part of many individual holders, is from the standpoint of the com-
munity mostly capitalized rental value. The wealth of the country as esti-
mated in the United States Census of 1880, vii., p. 11, is found to be forty-
three to forty-six thousand million dollars ; probably from sixteen to eighteen
thousand million should be classed as permanent investment. It is probable
that on this basis of valuation the total amount of corporate property amounted
to ten or twelve thousand million dollars, about three fourths of which should
be classed as permanent investment. But these figures are very uncertain.

* Here we stand on surer ground in making our estimates. It is not
probable that in the years from 1870 to 1880 the total wealth of the world
increased much more than ten per cent. But the use of machinery, as indi-
cated by the consumption of coal and iron, increased from forty to fifty per
cent. ; and the railroads of the world increased seventy-five per cent. See
Mulhall: "Balance Sheet of the World, J870-1880"; Neumann Spallart;
** Uebersichten," 1884, pp. 266-289, 439.

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44 RAILROAD TRANSPORTATION.

This is what distinguishes it from a partnership.' If a
man puts a thousand dollars into a partnership, and the
firm contracts debts in excess of its resources, he ma}r be
called upon to pay many thousands more to satisfy the
claims of creditors. But if he puts his thousand dollars
into railroad stock, he is quit of all further responsibility.
His liability is limited to the amount of his original in-
vestment. If the company is well managed he will get
his dividends. If it is badly managed he will probably
lose his money. But in no case can he be compelled to
pay more than the face value of his stock subscription.
If the liabilities of the company exceed its resources, that
is the creditors' look-out. They can take possession of
the concern and run it to suit themselves ; but they have
no further claims against the individual stockholders.

What is true of railroad stock is generally true of manu-
facturing stocks, and partially true of the stock of banks
and other trading corporations. The liability of the indi-
vidual stockholders is in each case accurately defined by law.

In this respect the corporations of to-day are sharply
distinguished from those of the middle ages. The mem-
ber of a mediaeval guild did not lose one jot of his liability
for what the corporation might do. His whole person-
ality was bound up in the corporation. He ceased to
have an individual existence apart from it. John Smith,
A.D. 1300, was not, primarily, a citizen of England, but a
member of the guild of smiths in the city of London,
which city was a member of the English body politic.
Whether he wrought or fought, he did it not as a free-bom
Englishman, but as a Smith of London. Any analogy
between the mediaeval guild and the modem corporation

' This is of course not intended as a legal definition (compare Taylor on
Corporations, chaps, iii., iy.») but as a popular statement of facts.

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RAILROAD OWNERSHIP AND SPECULATION. 45

is almost always misleading.' The former was an associ^
ation asserting its claims in every direction while the
state was still weak. The latter is an association estab-
lished for specific purposes by a state which has become
strong enough to protect the association in its privileges,
and to limit it to the purposes for which it was organized.

The first corporation of the modem type was a bank
chartered at Genoa, in 1407, for the purpose of funding
the national debt of that city." The next important in-
stances were the great merchant shipping companies of
Holland, England, and France, of which the English East
India Company has been the most famous. The first of
these was chartered about the year 1600. This form of
organization grew in public favor for a hundred years.
Then the wild speculations connected with John Law's
bank in France in 1720, and the "South Sea Bubbles" in
England, at the same date, produced a reaction, and the
development of corporate business was checked until after
the close of the Napoleonic wars. Their really rapid
growth dates from 181 5.

There is a necessity for such corporations in the nine-
teenth century which did not exist in the eighteenth.
The development of the steam-engine has caused large
enterprises to take the place of small ones. The era of
large factories began about 181 5 ; that of railroads in 1830.
In two generations we have seen an investment of over
$30,000,000,000 in applied steam power.*

The work was indispensable, — but where was the money

* J. E. Thorold Rogers : " Six Centuries of Work and Wages," London and
New York, 1884, pp. 106-113. ^

■ F. Kleinw£chter in SchOnberg's '* Handbuch der politischen Oekonomie,**
pp. 197, 198. Tubingen, 18S2.

■Engcl: "Zeitschrift des Konigl. Preuss. Stat. Bureaus " (Berlin), 1880,
F 121.

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46 RAILROAD TRANSPORTATION,

to come from? The largest fortunes of half a century
ago were inadequate to meet the demands of the factory
and railroad systems, even if their owners had been in-
clined to take the whole risk of these untried enterprises.
On the other hand, the small capitalists needed just such
a chance of investing their savings, provided it could
be done without undue danger. The investment needed
the small capitalist, and the small capitalist needed the
investment. The problem was solved by applying the
system of limited liability to all these undertakings. The
modem form of corporation prevailed because it was
found to be the best form of ownership for the large per-
manent investments under concentrated management
which are required in modern industry.

This result was not reached off-hand. Many people
were violently opposed to the new system. It gradually
forced itself into public favor, because the communities
which refused to adopt it got very little good and a great
deal of harm from their refusal. The laws of Massa-
chusetts sixty years ago were unfavorable to joint-stock
enterprise. Capital was thereby driven into other States
for investment. The growth of Massachusetts business
was hindered, and its character was not really helped.
The final result was that the laws had to be modified.*

The case of England was still more marked. In the re-
action from the speculations of 1720 the principle had
been adopted that limited liability should be granted only
by special charter from Parliament. The result was an
infinite amount of expense and jobbery at this point.
Whether an enterprise received its charter, depended

' Angell and Ames on Corporations (9th £d., Boston, 1871), pp. 6o7->
610. Amer. Jurist, 4, 307. For the history of the ** General Railroad Law"
see chapter vii.

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RAILROAD OWNERSHIP AND SPECULATION. 47

quite as much upon the skill of its lobbyist as upon the
soundness of its prospects. The smaller undertakings
could not go to the expense of securing special charters.
Too often they were thus thrown out of the hands of bona
^^£f investors, and into the hands of those who, having little
to lose, had little to fear. Speculation was thus fostered
by the laws which were meant to restrain it. One after
another these laws had to be repealed.* Some of the ob-
noxious provisions still remain ; but the failure, in 1878,
of the City of Glasgow Bank, which was organized under
the old system, gave the death-blow to that system.
Hundreds of small investors were irretrievably ruined ;
and this fact did more than any amount of talk would
have done to show the, folly of sending the investor to
the poor-house in order to protect the creditor from any
loss whatsoever. The small investor is a necessity of
modem industry; and the modern form of corporation
has been found the one available means to encourage and
protect him. The fact that it was adopted reluctantly
makes the proof of its necessity all the stronger.

In laying stress upon the necessity of corporations in
their present form, we do not pretend that they have
been productive of unmixed good. On the contrary,
their growth has been attended with evils and dangers at
every step.' There are evils involved in the existence of
large permanent investments of any kind. There are
other evils involved in the corporate ownership of such
investments. Some abuses are connected with the busi-
ness management of a railroad or a factory, simply be-
cause it ^ a railroad or a factory ; others are due to the
fact that it is owned and managed by a joint-stock com-

' Kleinwichter, pp. 201, 202.

■ Simon Sterne : " The Corporation : Its Benefits, its Evils." New York,
i88a

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48 RAILROAD TRANSPORTATION.

pany. The former cause is more important than the
latter. Many of the evils attributed to joint-stock owner-
ship are due to the character of the enterprise rather than
to the way in which it is owned, and show themselves just
as strongly in enterprises of the same kind which are owned
and managed by individuals. Some of these evils affect
the general public. Others more directly affect the investor.
It is with the latter class that we are at present concerned ;
a class of evils which may be included under the somewhat
vague name of speculation.

Speculation, in the narrowest sense of the word, is the
attempt to make money out of fluctuations in the value
of property, as distinct from its earnings.

In a wider sense, speculative business is that business
which involves large risks for the chance of large gains

In a still wider sense, speculative management is the
management of property by inside rings for purposes
distinct from the permanent interests of its owners.

To the first of these forms of speculation, corporate
property is liable, in common with almost all other prop-
erty. To the second it is specially liable, because large
permanent investments involve special risks. To the
third it is still more specially liable, because the mass of
owners have no direct voice in its management.

Each of these forms of speculation always goes on to a
certain extent. But there are times of comparative rest ;
and, on the other hand, times when speculation develops
an unusual and abnormal activity. A time of active spec-
ulation is almost always followed by a more or less severe
reaction. It is this reaction which constitutes a commer-
cial crisis.* This alternation between unhealthy activity

^ There is a decided lack of literature on the history of commercial crises.
The best book is Max Wirth : ** Geschichte der Handelskrisen/' Frankfort,

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RAILROAD OWNERSHIP AND SPECULATION 49

and depression, this ebb and flow of the industrial life, con-
stitutes one of the most serious problems with which the
political economist has to deal. The moral fevils of the
period of speculation, and the material evils of the crisis,
are alike fraught with danger to the community.

Legislation is of little avail against these evils. The
causes which produce them lie beyond the sphere of
effective state interference. Legislation against commer-
cial crises is about as effective as legislation against chills
and fever. You may provide good sewage by public
authority ; but it rests with the individuals whether they
will bring themselves into proper connection with the
system. If you legislate too much, you may so weaken
individual responsibility as to do more harm than good.
Once let the idea go forth that it is the duty of the state
to take care of everybody, and everybody will cease to
take care of himself.

There is another difficulty with such attempts to limit
speculation by law — the impossibility of separating the
bad from the good. Speculation is a necessity of modem
life. Modem business involves large risks ; some one
must take them. The important thing is that the risks,
should be taken by men with judgment to foresee the
probable effects, and property to stand the possible
strains ; and that men who lack the .judgment and the
property should not take the risks.*

It rests with individuals to learn the lessons of each
crisis, and protect themselves, as best they can, from a

1874. W. M. Grosvenor : "American Securities, etc., from 1872 to 1885"
(issued too late for detailed reference) is an important addition to our authori-
ties on this matter. See also article " Commercial Crises," by Horace White,
in Lalor's Cyclopaedia, vol. i.

' See article " Speculation," in Lalor*s Cyclopaedia, vol. iii., and the refer-
ences there given.

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50 RAILROAD TRANSPORTATION.

recurrence of the same evils. The crisis of 1857 taught
us the folly of business based on speculative banking.
That of 1873 taught us the folly of land speculation, and
of stock speculation in some of its grosser forms. It taught
the business men of the country to look forward to the
possibility of a sudden panic, and guard against its effects.

But the conditions which preceded the present crisis
were radically different from those of 1873 ^^ 1857. There
was almost no speculative banking. There was a notice-
able absence of land speculation. Most remarkable of all,
the crisis of 1884 has thus far been attended by no general
panic of the first rank, though we stood on the verge of
one in May of that year. There has been no crash at
any one point, but a steady sinking all along the line.
Men who were prepared to weather a sudden storm, how-
ever severe, have found it impossible to resist this steady
downward tendency, month after month.

All these things, which we had been accustomed to
consider necessary precursors of a crisis, were conspicuous
by their absence. The conditions which did exist, and
which seem to have most to do with causing the present
crisis, were, first, an unprecedently rapid expenditure of
capital for railroads and other permanent investments,
and, second, a system of business methods which rendered
it easy for inside rings to manipulate the market for their
own purposes. It is 'important to analyze the workings
of these causes, especially the first.

After the long period of depression following the crisis
of 1873, the year 1879 witnessed a revival of confidence.
The volume of business increased decidedly ; there was a
general advance in prices, and in some lines — iron produc-
tion, for instance — where the old facilities could not be at
once increased to meet the new demand, an extraordi-

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naiily rapid advance. Good wheat harvests in the West,
combined with an active European demand, caused this
expansion of business to continue through the years 1880
and 1881.

Any increase of price, or even of volume of business,
means a far greater proportionate increase of net earnings.
If the price of $30 a ton on pig-iron gives a profit of $5, a
sudden increase to $35 will give a profit of about $10. An
increase of 17 per cent, in the price would thus make a
difference of 100 per cent, in the profit on the transaction.
If new capital could at once come into competition, such
profits could last but a few weeks. But it takes time to
build a successful furnace, factory, or railroad. Those
who were already in the business had, for the time being,
a partial monopoly, which they strengthened by pooling
arrangements.

The years of expansion were years of large return to
the owners of the old investments. A large part of this in-
creased return was not spent on luxuries, but re-invested.
Another large mass of money for re-investment was set
free when the United States Government called in its
bonds. These two causes created an active demand for
good investments. The prices of all good securities went
up so high that it was impossible to obtain satisfactory
rates of interest. In the desire to obtain old rates of
interest, capital sought new investments.

A new permanent investment is almost necessarily
speculative. But investors did not look at the matter in
that light. Men who would not have thought of taking
risks to secure ten per cent, instead of six per cent., took
worse risks to avoid the reduction from six per cent,
to five per cent. If an investment promised but six
per cent, interest, they thought it prima facU sound.

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52 RAILROAD TRANSPORTATION.

If it was in the form of a first-mortgage bond, it seemed
prima f(uie secure. Only a small part of the stock specu-
lation was of the first form. There was a great deal of
unconscious stock speculation of the second form ; and
this opened the way for the third and worst form of specu-
lation, which was practised on a large scale.

In the three years 1 880-1 882 we built 29,000 miles of
railroads, an addition of thirty-four per cent, to the rail-
road mileage of the country. Not more than one third
of these were justified by existing business. Another
third, perhaps, were likely to be profitable at some future
date, or at any rate to be of real service to the com-
munity; but not now. Of the remainder, some were
built to increase the power of existing systems, where
they were not needed and not likely to be needed on their
own account. Some were built to put money into the hands
of the builders, as distinct from the owners. Some were
built to sell, as a blackmailing scheme against other roads.

To make money out of the building of a railroad, it was
only necessary to subscribe the small sum requisite for
obtaining a charter, with the right to issue first-mortgage
bonds. The original subscribers would then have at
their disposal whatever funds the bondholders might
furnish. They could pay themselves a good commission
for selling the bonds. They could then organize as a con-
struction company, and contract to pay themselves a high
price for building the road. These are but two means
among many which afforded them an opportunity of
transferring the bondholder's money to their own pockets
in their double capacity as directors and contractors.*

' Hassler, C. W.: " Railroad Rings, and Their Relation to the Railroad
Question in this Country." New York, 1876.
In other cases, rather less frequent, the bona-fide stockholders wer«

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RAILROAD OWNERSHIP AND SPECULATION. 53

This was not the worst. When the money came out of
the bondholders' pockets, the bondholders were in some
sense responsible for being duped. Sometimes the money
came out of the pockets of the stockholders of rival
roads, who were in no sense responsible. Some roads
were built because they could so injure existing roads by
competition as to force those roads to buy them out.
The system of receiverships, originally intended as a pro-
tection to investors, has been carried to a point where it
tends to the furtherance of schemes like these. Such
was the character and purpose of many of the recent
railroad projects.*

The rest of the story is soon told. Insolvent themselves,
they dragged their solvent competitors down to their own
level. The causes which in i879-*8i had operated to pro-
duce an advance, soon passed away. The natural decline,
which at best would have cut down the profit of the
permanent investments, found some of them loaded with
a weight of new debt, and many of them struggling
against the reckless competition of insolvent rivals. This
is where we stand to-day. What has been true of rail-
roads has been true of other forms of permanent invest-
ment. First, high charges and high profits. Then
speculative investments in the same line. Next, an
overstocked market, and no profit at all. Finall)% cut-
throat competition and widespread insolvency.'

saddled with a load of debt and other fixed charges out of which the inside
ring could make its profit.

> Compare the detailed history of the West Shore Road, as given in
Bradsireets, April 25, 1885.

* The Railway Age (Chicago) publishes at the beginning of each year
a really valuable table of mileage and capital of railroads sold under foreclos-
ure in the series of years preceding. In the years 1876-1880, while the crisis
of 1873 was working out its full effect, nearly a quarter of the railroad mileagt
of the country was thus foreclosed Oi xsorganized.

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54 RAILROAD TRANSPORTATION.

To the community, the present crisis is a lesson on the
folly of reckless investment. Over-production, of which
we hear so much, is a small matter compared with this.
Mere over-production can be remedied in a few months.
Over-investment means lasting over-production till the in-
vestment itself is worn out, or till the business of the
country slowly grows up to a higher point. Our present
crisis is directly connected with ill-judged over-investment.
The folly of investors provoked it; the inclination of
managers favored it ; the knavery of rings was able to
make a profit from it.

Under the stress of this experience, a great many favor
limitation of railroad construction.' Whether this can
ever be effiectively carried out is more than questionable.
That it would be desirable in riiany cases, there can be no
doubt. But it is not easy to introduce a principle so
foreign to the general tendency of our laws ; and it may
be questioned whether any advantages gained at one
point would not be dearly purchased at another. The
whole matter will have to be settled on practical grounds ;
and it is not easy to predict which way the balance will
incline. Of this there can be no doubt : that it is desir-
able to limit the facilities for constructing railroads with
other people's money.' Yet even here the practical en-

1 Kirkman, M. M. : '' The Relation of the Railroads in the U. S. to
the People and the Commercial and Financial Interests of the Country."
Chicago, 1885. Also an able review of this pamphlet in The Nation (N. Y.),

xl., 133.

Compare the recommendations of N. Y. State R. R. Commissioners in
each of their reports thus far issued.

* J. B. Hodgskin, in N» V, Nation, xii., 398, on " The Borrowing Power
of Corporations."

This is the most serious evil connected with the system of stock-watering.
Stock-watering has three forms : i. Where new stock is issued to represent
money which, instead of being paid out as a dividend, is used in improving

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RAILROAD OWNERSHIP AND SPECULATION. 55

forcement of any law is more difficult than would at first
sight appear.

To individuals, whatever else the present crisis may
teach, it teaches : i. That the evils of speculation are not
avoided by avoiding its first and most obvious forms. 2.

the property. 2. Where new stock is issued to represent an actual increase
in the earning capacity and market value of the property, so that the par
value shall represent as nearly as possible the real value. 3. Where stock is
issued to give certain parties control of the road without actually risking any
thing like the amount of money represented by the par value of their shares.

The second is on the whole the commonest form. It is resorted to for two
reasons : either to equalize the share of the stockholders of different roads in
a consolidation, or else to furnish an excuse for paying higher dividends than
the law or public sentiment would otherwise allow. Any such evasion of the
law is a bad thing in many ways. But the immediate effect is not as bad as is
commonly supposed ; for, as we shall see in a subsequent chapter, the attempt
to keep rates down by limiting dividends defeats its own purposes ; and the
fact that such a limitation of dividends is evaded, therefore makes very little
difference to the shipper.

The third form of stock-watering, for purely speculative purposes, is by
far the worst — in fact it is one of the worst evils of its kind under which the
country suffers. And it is a great misfortune that it is not more clearly dis-
tinguished in the public mind from the first and second forms. The real
evils of the third form are allowed to go on unchecked, because they are not
treated separately from the much less real evils of the first and second forms.
The unsuccessful attempt to prohibit them all prevents any successful attempt
to prohibit the worst of them.

For a somewhat different view, see Simon Sterne, in Lalor's Cyclopaedia,
Art. " Railways," pp. 527, 528.

See also Report of Special Com. on R. R. Transportation of the N. Y.
Chamber of Commerce, on " Watering the Stocks of Corporations," Nov. i,
1883. The position taken in this report seems quite different from the one
just advocated ; but, in reality, it comes to nearly the same thing. The
committee, it is true, would prohibit all three forms ; but they would, at the
same time so modify the law or feeling, with reference to high rates of
dividend, as to take away nearly all inducement for stock-watering of the
first or second forms. This is the effect and intention of proposition 6, on p. 5
of the report. This would bring the law sharply to bear against the third and
worst form.

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$6 RAILROAD TRANSPORTATION.

That when large quantities of capital are seeking invest-
ment, it may be as unsafe to try to avoid a reduction of
rates of interest as it is at other times to take risks to
secure an advance. 3. That investors are under obliga-
tions to themselves and to the community to make sure
that their property is not managed for other interests
than their own. The interests of the investor are the
permanent interests of the property ; those of the director
are often temporary, and sometimes purely personal ones.
The two may readily conflict. If the permanent interests
are sacrificed, it must result in ruin to the investors, and
may result in commercial distress for the whole com-
munity.*

It is in this connection that the study of railroad ac-
counts assumes its public importance.' The fact that so
few among the many owners of a railroad have any direct
share in its management, makes it all the more important
that its published accounts should present a true view of
its financial condition. They are too often arranged to
conceal the truth instead of presenting it.

The general principles involved in the published accounts
of a railroad are simple. Their practical application is
diflficult in the extreme. We can do no more than show
what these principles are, and where the chief difficulties
and dangers lie.

A railroad has two ways of getting money ; it may earn
it, or borrow it. It has three ways of getting rid of money ;
it may spend it, invest it, or divide it. These things will
generally nearly balance one another ; any difference will

* Herbert Spencer : '* Railway Morals and Railway Policy," Edinburgh
RetdtWy Oct., 1854.

* Massachusetts R. R. Commissioners' Reports, 1874-187S. Kirkman :
'* Railway Ejcpenditures : Their Extent, Object, and Economy," Chicago^
1880, vol. ii., pp. 1-136.

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RAILROAD OWNERSHIP AND SPECULATION. $7

be represented by variations in the amount of cash assets
on hand from time to time. The whole is summarized in
the treasurer's balance sheet for the year, which includes
all the financial transactions, of any sort whatever, during
the time in question. The form, much condensed, is as
follows :

A. P,, Treas*r, in acc't with the M. and N R, R,
Dr. Cr.

Cash assets, January I, Expenses* $750,000

1884 % 50,000 Permanent investment' 70,000

Gross earnings . . . 1,000,000 Dividends 240,000

Increase of debt ^ . . 65,000 Cash assets, Dec. 31,

1884 55>ooo

$1,115,000 $1,115,000

This is the fundamental account of which the others are
but parts. Comparatively few railroads publish their treas^
urer's balance sheet ; but with the aid of two successive re-
ports of a railroad, a man moderately familiar with these
matters can deduce the treasurer's balance sheet for the in-
tervening time.

From merely looking at this account it is clear that if the
item, " Increase of debt," had been made $75,000 instead
of $65,000, the amount o( dividends might have been
$250,000 instead of $240,000, without either changing any
of the other items, or destroying the balance of the whole
account. In other words, the amount apparently available
for dividends varies with the amount of increase of debt ;
and this last matter is largely under ^ the control of the
directors. Here is where most of the abuses of railroad
accounting arise.

' Either in the form of bonded debts, notes payable, or simply bills and ac-
counts payable. Every thing not in the form of bonds is included under the
title of floating debt.

' Operating expenses, interest, rentals, and taxes.

' New construction, equipment, etc., as distinct from mere repairs.

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58 RAILROAD TRANSPORTATION.

The matter comes up in this general form. As the facts
are presented to the directors, it is found that the gross
earnings of the road for the year have been $i,ooo,ooa
The total expenditures of every kind have amounted to
$820,000, of which (say) $700,000 have been paid, leaving
$120,000 unpaid. The treasury then has on hand $300,-
000 (besides an amount of unused cash assets, materials,
etc., of $50,000, which must be kept at about that
figure). If they pay up all their bills, they have $180,000
to divide. If they pay none of them they have $300,000.
The question is, how much shall they pay ?

The first impulse of most men is to say, let them pay
their bills first, and then divide what is left. A closer ex-
amination shows a great many cases in which this principle
cannot be applied. Suppose a railroad builds a branch line
to secure new traffic. To attempt to pay for this out of
current earnings would perhaps be impossible. To try to
pay any considerable part in this way, would be to keep
money out of the investor's pocket which had been really
earned, and apply it to an extension of the business. A
private individual may do this. He Can readily invest his
capital in extension of his own business. But a railroad
manager cannot do this. He is dealing with the property
of a large number of independent investors who want ac-
tually to receive whatever is really earned, and not be
forced to re-invest it, whether they will or no. If a rail-
road man wishes to build branches, or to double his track,
or to make large additions to his equipment — all of which
increases the permanent investment, and probable earning
capacity of the road, — he feels justified in borrowing
money to pay for it. In the case in question, of the
$120,000 spent and unpaid, the theory would be to pay all
that was due to current expenses, or perhaps a little more,

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RAILROAD OWNERSHIP AND SPECULATION.

59

and borrow whatever was used for permanent investment,
or perhaps a little less. The amount of earnings remaining
in handy after the current expenses have been paid, is the
sum available for dividends.

They then separate the account into two parts : one, the
"income account," giving the current receipts and ex-
penses; the other, to be incorporated in the "general
balance sheet '* of assets and liabilities of a more perma-
nent nature.

The income account will then read thus :

Grois earnings . . . |i,ooo,ooo Exi>enses l750,ooo

Dividends .... 240,000

Surplus for year . . 10,000

$1,000,000 $1,000,000

The rest of the account is added to the general balance
sheet of the previous year, thus :

General Balance Sheets Jan. i, 1884.

Liabilities.

Stock $4,000,000 Constniction

Bonds 2,000,000 Equipment .

Floating debt . . . 200,000 Investments '

Surplus 100,000 Cash assets .

$6,300,000

Assets,

• $5,000,000

700,000

550,000

50,000

$6,300,000

To which must now be added from the year's account,
every thing not included in the current earnings and ex-
penditures, thus :

Cash assets, Jan. i, 1884
Increase of debt . . .
Surplus for year ' . .

$50,000
65,000
10,000

$125,000

New construction . .
Cash assets, Jan. i, 1885

$70,000
55,000

$125,000

' Real estate, stock of other corporations, etc.

* Whatever a road earns, and does not spend or divide, constitutes the
surplus for the year. In the income account it appears on one side, to make

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6o RAILROAD TRANSPORTATION.

The first item in this account cancels the last item of
the general balance at the beginning of the year, and we
then have by simple addition

General Balance Sheet y Jan. i, 1885 * :

Stock $4,000,000 Construction . . . $5,070,000

Bonds ...... 2,000,000 Equipment .... 700,000

Floating debt . . . 265,000 Investments .... 550,000

Surplus 110,000 Cash assets .... 55><»o

$6,375,000 $6,375,000

The theory is simple enough. But there is an enor-
mous practical difficulty in knowing what are current ex-
penses and what are permanent investments.

A railroad has a wooden bridge which needs repair.
Instead of repairing it the company substitutes an iron
bridge whose first cost is much greater. How much of
the cost shall be charged to repairs and how much to new
construction? Or, to take a problem which was con-
stantly coming up a few years ago : A road takes up
iron rails which cost it $50 per ton, substitutes steel rails
at $60 per ton, and sells the old iron at $30. How shall
the debits and credits be divided between the repairs and
construction account ? These are far from being excep-
tionally difficult cases to deal with.

Even with the best of intentions on the part of railroad
managers, these things are hard to decide. When the

the payments balance the receipts. In that part of the account which is car-
ried over to the general balance sheet, it must appear on the other side, to
make the liabilities balance the assets. Sometimes there is a deficit instead
of a surplus. Then the whole matter is reversed.

' The general balance sheet at any given time is really nothing more nor
less than a sum of the permanent part of all previous balance sheets ; tlie
successive permanent investments on one side, the means by which they
were paid for on the other.

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RAILROAD OWNERSHIP AND SPECULATION. 6l

intentions are not the best, it is easy to decide them
wrongly, and hard to detect the wrong. It will quite
frequently happen that the management is far more inter-
ested in having a road declare large dividends than in
having its capital account on a sound basis. To declare
a dividend which they have not earned, they must find a
pretext for borrowing money. This they usually do by
swelling the item of new construction unfairly. If they
charge to new construction what really belongs to repairs,
they can borrow money to pay for what should really
have been paid out of earnings, and apply the money,
thus unfairly saved, to swell the sum available for divi-
dends. This is one among many ways; but it is more
common than all the rest put together.*

We have thus far treated the question from the inside
point of view : The facts being given, what dividends
should be or can be paid ? To the general public
the matter appears in a somewhat different light. A
dividend having been paid, how can an outsider deter-
mine from the accounts whether it has presumably been
earned ? It is impossible to give a really satisfactory
answer to this question. We can only call attention to
a few of the more decisive indications.

We have seen that the common way of swelling divi-
dends is to charge repairs to new construction, and borrow
money to pay for it. If then we find that the sum for
repairs is small, and for new construction large, and that
there is a constant increase of the floating debt, there is a
strong presumption against the management, and against
the honesty of the dividend. It requires some technical
knowledge to decide whether the amounts charged to

* Another way of doing the same thing, is to charge high prices for haal-
ing the materials which a road uses in its own construction. The earnings
are thus swelled at the expense of the construction account.

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62 RAILROAD TRANSPORTATION.

repairs and construction respectively are really large or
small. They have to be compared both with the statis-
tics of what has been actually done, and with previous
annual reports of the same company. From one such
report we can learn but little. If in a series of years we
find the repairs diminishing, and the new construction
increasing, without any marked change in the general
condition of the road, we may be reasonably sure that
something is wrong.

It IS rather easier to draw these inferences now than it
was a few years ago. One of the best pieces of work
done by the Massachusetts Commission was on this mat-
ter of railroad accounts. In consultation with the officers
of the companies, they attempted, some ten years ago, to
secure a certain uniformity in railroad returns, and were
so far successful that their example was followed in other
States. In the years 1878--9 there was an effort made by a
number of different State commissions to secure com-
mon forms of return throughout the country ; and in this
they were reasonably successful.

No system of accounting, however perfect, will secure
the public against false original entries; nor will any
amount of technical knowledge avail to detect certain
forms of rascality. If a man says he has spent money for
coal, when really he has put part of it into his own pocket
in the form of a commission, nothing short of personal
comparison between the vouchers and the quantity de-
livered can do more than raise an unproved suspicion.
But if the evil lies not in the original entries, but in the
deceptive manipulation of those entries, the requirement
of a good system of returns will do much to check it, and
the intelligent study of those returns will do a great deal
more.

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CHAPTER IV.

COMPETITION AND COMBINATION IN THEORY."

Different forms of monopoly — Recent growth of industrial monopolies — The
law of competition as commonly stated — Cases where it fails to operate
— Difference between mercantile competition and the competition of
factories or railroads — Forms of combination — Pools — Labor combina-
tions — ^The legal view of these matters, and its results.

H. Sidgwick : " Principles of Political Economy," London, 1883 ;
book ii., chap. x. : "Of Monopoly and Combination."

T. H. Farrer : " The State in its Relation to Trade." London, 1883,
chap. X. This chapter is condensed from an article by the same author in
the Quarterly Review^ October, 1871, entitled " Industrial Monopolies."

H. D. Lloyd : " Lords of Industry," North American Review ^ June,
1884.

Fr. Kleinwachter : "Die Kartelle: ein Beitrag zur Frage der Oi^^aniza-
tion der Volkswirthschaft." Innsbruck, 1883.

For authorities dealing specially with the subject of railroad combination,
see next chapter.

Competition is the effort of rival sellers to secure a
market for their goods, each striving to offer better terms
than his competitors. Competition is what prevents any
individual from fixing prices to suit himself, because his
rivals will give lower prices, and he will get no business
at all.

The opposite of competition is monopoly. Where com-
petition does not act at all, there is complete monopoly ;
where it acts imperfectly, there is partial monopoly.

^ Part of this chapter appeared in the Andover Review, Nov., 1884 ; part
in the Independent , Jan. 29, 1885 — one of a series of articles which havt
furnished material for chapters iii., vi., yii., and xiii.

63

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64 RAILROAD TRANSPORTATION.

A monopoly may be either legal, natural, or industrial

A legal monopoly is where competition is prohibited
by law. The trade guilds of the middle ages were com-
plete legal monopolies, because no one outside of the
gfuild was allowed to engage in the trade. The postal
service is a monopoly of the United States Government,
because no private individual or corporation is allowed to
compete in the business of letter-carrying. Protected in-
dustries are partial monopolies, because no foreign pro-
ducer is allowed to compete with the home producer on
equal terms.'

A natural monopoly is where competition is physically
impossible. The water supply of large cities is often a
tolerably complete natural monopoly, because the avail-
able sources of supply are so few that they will often be
in the hands of a single company. It is the same way
with canals and with docks, with mines, and even with
lands. The land which is best available for any particular
purpose is so small that the owners of other land can
compete but imperfectly with the owners of the most
favored spots, who can therefore exact a return for their
monopoly privileges in the form of ground rent." Rent is
the price paid for the use of a natural monopoly.

An industrial monopoly is where the business interests

r

' With these exceptions there are no legal monopolies in the United States
(unless patents or copyrights be thought to haye that character). In times
past, such monopolies were frequent. Steamboat navigation in the State of
New York was for many years a legal monopoly. Efforts were made by
certain railways in Massachusetts to obtain monopoly rights — not entirely
without success (Adams, p. 56). Compare the history of the Camden and
Amboy Transportation Co. in New Jersey.

On the continent of Europe l^al monopolies are by no means uncommon
at the present day.

* A large part of the monopoly of existing railroads consists in the posses*
sion of city real estate which gives them superior terminal facilities.

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COMPETITION AND COMBINATION. 6$

of the parties concerned make competition practically im-
possible, even when there is neither law nor natural obsta-
cle to hinder it. And the present age is an age of industrial
monopoly, however we may try to shut our eyes to the fact.
We have not free competiton, nor can we fairly expect
to have it in the future. Instead of moving toward it,
we are moving away from it. This is a fact to which
people are just beginning to open their eyes. They
begfin to see that in a great many cases prices are deter-
mined, not by competition, but by combination. They
do not yet see the real extent to which this tendency
prevails. Still less do they understand the reasons why
it must prevail, now and in the immediate future.

We are generally supposed to live in an age of free
competition. The legal restraints upon business which
two centuries ago were the rule have now become the ex-
ception. They are only in force on the national frontiers,
in the form of a protective tariff against the foreigner.
Within these frontiers a man is allowed to use his own
judgment as to the best chance of making a living ; he
is neither restricted in his choice, nor supported if he
makes a mistake. He must look out for his own market.
None will be compelled by law to have their flour ground
at his mill, or their clothes made at his shop.

Physical as well as legal hindrances to competition are
passing away. The invention of railroads has made
transportation ten times quicker and ten times cheaper.
Two generations ago, the expense of cartage was such
that wheat had to be consumed within two hundred
miles of where it was grown. To-day, the wheat of
Dakota, the wheat of Russia, and the wheat of India
come into direct competition. The supply at Odessa is
an element in determining the price at Chicago. Two

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66 RAILROAD TRANSPORTATION.

generations ago, the market-gardeners of the suburbs had
a monopoly of the supply of fresh fruit and vegetables for
the city ; now, fast trains bring the whole country for hun-
dreds of miles into competition with them. Western beef
now competes with Eastern beef even in the country towns
of New England. Cabbages from Germany contend with
cabbages from Missouri in the markets of New York.
The local tradesman is no longer sure of the local trade.
Mercantile houses in the city, doing business by agent or
by correspondence, try to undersell the jobbers of smaller
towns, or even to take away business from the country
stores. Factories, which twenty years ago were not
within arm's reach of one another, can now get railroad
rates low enough to enable them to carry a fierce com-
petitive war over the whole district which they supply.

The old monopolies are dead, the old barriers to trade
are disappearing. But the same movement which has done
away with legal monopolies, and has gone so far toward
abolishing many natural ones, has created a system of in-
dustrial monopolies even more widespread and formidable.
We are seeing how this tendency acts in the case of rail-
roads in the United States. It has been no less marked
in Europe. George Stephenson foresaw the future of
railroad combination from the first. "Where combina-
tion is possible,*' he said, " competition is impossible." A
few English statesmen agreed with him. The majority
were either too blind to see, or too weak to act. It was
only by the hardest experience that they learned the
lesson ; but once learned, it was learned thoroughly.* On
the continent of Europe, railroad combination prevailed
yet more completely. On either side of the Atlantic,
most persons who have really looked into the subject have

' See chap. ix.

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COMPETITION AND COMBINATION, 6/

come to regard railroads as a sort of natural monopoly,
not regulated by the ordinary laws of trade, and needing
to be closely watched by public authority.

But we are now beginning to find combination in a mul-
titude of other cases where, until now, we have supposed
ourselves to enjoy the benefits of free competition. The
story of the Standard Oil Company * opened the eyes of a
great many people. Some twenty years ago two or three
men, of small capital but great business ability, got hold
of a new process for refining petroleum. Their ability and
their process gave them an advantage over their competi-
tors, who found the competition ruinous, and one after
another were led either to make terms with them or with-
draw from the field. The result was an organized associa-
tion, with a capital which ultimately reached eighty million
dollars, including nearly all the refineries in the country.
The association settled just what prices should be charged
in each district, and there was no man who had a chance
of competing with them independently. For the company,
besides the power obtained by controlling an enormous
capital, had come into such relations with the railroads and
the pipcrlines that no independent refiner had any chance
whatever. These contracts, more discreditable to the rail-
roads than to the Standard Oil Company, were what
attracted public attention to its doings. In other respects
its work seems to have been good. The quality of oil has
been improving, the price has been declining rapidly ; it
could hardly have declined faster under free competition.
But the public are alarmed at the growth of such a power
in their midst, — able, apparently, to dictate the price of a

* Among the numerous articles on this subject may be mentioned those
of Messrs. Camden and Welch {pro and con) in the North American HevUvt,
yol. 136, pp. 181-200.

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68 RAILROAD TRANSPORTATION.

necessary of life, and subject to no restraint or control
from outside. Statesmen, lawyers, and journalists held up
their hands in holy horror, and exclaimed : '^ Can such
things be?"

But the more they looked, the more they were forced to
the conclusion that such things could be and had been,
and are still increasing. • Nearly every industry employing
fixed capital on a large scale has its pool, whether they call
it by that name or not.' The Anthracite Coal Combina-
tion has been less successful than the Standard Oil Com-
pany ; but its method of crushing small rivals by denying
them transportation facilities has made it almost equally
notorious.' And now the system of combinations has
extended to other coal regions besides the anthracite.
Again, every branch of hardware, from rails to carpet tacks,
has its combination to keep up prices or restrict production.
The cases are only too frequent where the combination
pays certain mills for not running more than they could
earn by running. For lumber and for paper, for cattle and
for milk, for cartridges and for matches,— in each business
there is an organized combination, fixing rates and often
limiting production.* The waterways themselves, which,
we are so often assured, are to protect us from the mon-
opoly of the railroads, have their rates fixed and their
traffic pooled by combinations of greater or less influence,
— from the local barge association of some interior town to
the great North Atlantic Steam Conference. How much
freight each of the leading steamships is to carry is not

* This is not confined to America. See Kleinwachter, pp. 137-8, and
elsewhere ; Geoiges Salomon '* Les Coalitions Commerciaks d'Aajourd'hui."
Paris, 1S85.

* For a brief statement of its purposes, see Report on the Internal Cdft
merce of the United States, 1879, PP- 179-182.

* Lloyd, •* Lords of Industry," p. 549.

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COMPETITION AND COMBINATION. 69

infrequently made the subject of agreement with the
owners of rival vessels.*

What is to be done in the face of a system like this ?
Our first impulse is to say that its growth must be stopped
at all hazards. We are inclined to sympathize with the
anti-monopolists in demanding that the laws which have
fostered abuses of this kind should be abolished or re-
formed. But have the laws actually fostered these
abuses ? It is hard to make out that they have, except
in the most indirect manner ; in its direct action the law
hinders and thwarts them. Contracts for the restriction
of trade are illegal, and the State will not enforce them ;
railroads feel this at every turn. The pools of to-day are
not like the monopolies of past centuries, or the guilds of
the middle ages, creatures and pets of the law ; they
arise from very different causes, and grow strong in the
face of adverse legislation.

All our education and habit of mind make us believe
in competition. We have been taught to regard it as a
natural if not necessary condition of all healthful business
life. We look with satisfaction on whatever favors it,
and with distrust on whatever hinders it. We accept
almost without reserve the theory of Ricardo, that, under
open competition in a free market, the value of different
goods will tend to be proportional to their cost of pro-
duction. According to this idea, if the supply of a par-
ticular kind of goods is short, and the price therefore so
high as to be greatly in excess of the cost of production,
outside capital will be attracted into the business until
the supply is sufficiently increased to meet the wants of
the market. But as soon as this point is passed, and the

' See Blue Book of Select Committee on Railway Rates, etc. Evidence^
1881, qu. I4,309-I4»330.

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70 RAILROAD TRANSPORTATIO//.

price begfins to fall below cost of production, people wiR
refuse to produce at a disadvantage, the supply will be
lessened, and the price rise to its normal figure. If all
this be true, competition indeed furnishes a natural regu-
lator of prices, with which it is wicked to interfere.

It was approximately true when Ricardo wrote ; but,
in the business of to-day, one point in the chain of rea-
soning fails, and the whole breaks down with it.' It is
not true that when the price falls below cost of production
people always find it for their interest to refuse to produce
at a disadvantage. It very often involves worse loss to
stop producing than to produce below cost.

Let us take an instance from railroad business, — here
made artificially simple for the sake of clearness, but in
its complicated forms occurring every day. A railroad
connects two places not far apart, and carries from one to
the other (say) 100,000 tons of freight a month at 25 cents
a ton. Of the $25,000 thus earned, $10,000 is paid out
for the actual expenses of running the trains and loading
or unloading the cars ; $5,000 for repairs and general ex-
penses ; the remaining $10,000 pays the interest on the
cost of construction. Only the first of these items varies
in proportion to the amount of business done ; the interest
is a fixed charge, and the repairs have to be made with

' The early political economists dealt chiefly with banking business, where
the circulating capital was large and the fixed capital comparatively smalL
For such business their theory was true enough. But in the business of the
present day — and especially in railroad business — the theory is far from rep-
resenting the real facts of the case. Economists are far from perceiving the
full difference between their assumptions and the reality. F. A. Walker and
others have shown how the law of competition fails to act smoothly in prac-
tice. Adolph Wagner shows how its action produces bad results. But they
ought to go much farther. In the case of industries with large permanent
investment, the law is not merely imperfect or bad in practice, it is false in
thooxy.

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COMPETITION AND COMBINATION. /I

almost equal rapidity, whether the material wears out,
rusts out, or washes out. Now suppose a parallel road is
built, and in order to secure some of this business offers
to take it at 20 cents a ton. The old road must meet the
reduction in order not to lose its business, even though
the new figure does not leave it a fair profit on its invest-
ment ; better a moderate profit than none at all. The
new road reduces to 15 cents ; so does the old road. A
15-cent rate will not pay interest unless there are new
business conditions developed by it ; but it will pay for
repairs, which otherwise would be a dead loss. The new
road makes a still further reduction to 11 cents. This
will do little toward paying repairs, but that little is better
than nothing. If you take at 11 cents freight that cost
you 25 cents to handle, you lose 14 cents on every ton
you carry. If you refuse to take it at that rate, you lose
15 cents on every ton you do not carry. For your
charges for interest and repairs run on, while the other
road gets the business.

If it be objected that such a case could not occur in
actual practice, the answer is that it does occur constantly,
and almost as a matter of course when the competing
road is bankrupt. " Business at any price rather than no
business at all," is the motto of such a road. It has long
ceased to pay interest ; it can pay for repairs by receiver's
certificates ; and it will take freight at almost any price
which will pay for the men to load the goods and the
coal to burn in the engine. And be it observed that when
a competing road does not carry the war to this point, it
is not a competitive rate. They may agree upon a 25.
cent rate, thinking that it will be a reasonable and at the
same time a paying one ; but such a rate is actually de-
termined by combination, even though they take cost of

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72 RAILROAD TRANSPORTATION.

service into account. Ricardo's theory was based upon
the assumption that when * payment fell below cost of
service active competition would cease. His theory fails,
because, far below the point where it pays to do your own
business, it pays to steal business from another man. The
influx of new capital will cease ; but the fight will go on,
either until the old investment and machinery are worn
out, or until a pool of some sort is arranged.

The railroad may serve as a type of modern business.
Wherever there are large permanent investments of cap-
ital we see the same causes at work in the same way.

In the year 1870 the Philadelphia price of No. i pig-
iron averaged $33.25 a ton, which probably represented
just about the cost of production, including a fair return
on the investment. The American product for that year
and the next was about 1,900,000 tons each. But through
1871 and the greater part of 1872 prices were rising; the
average for September, 1872, was $53.87. Large profits
like this attracted capital into the business ; the product
for 1872 was 2,855,000 tons, and for 1873, 2,868,000 tons.
So far, Ricardo's theory worked well. Then prices
dropped faster than they had risen. December, 1873,
they were $32.50 a ton ; December, 1874, they were
$24.00. For the year 1878 they averaged but $17.62.' But
the iron men could not restrict their production as fast as
they had increased it. To allow their furnaces to go out
of blast was to allow their business to go to ruin. They
continued to produce at a great loss, and to fight more
desperately the greater the loss became. Some concerns
succumbed, some pulled through to see more prosperous
times. But for a period of six years millions of tons of

' Reports of James M. Swank, Sec'y of the American Iron and Steel
Association.

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COMPETITION AND COMBINATION. 73

iron were produced and sold below cost, their owners
being thankful if the price paid would cover raw materials
and wages, without any regard to interest or renewal.
The same thing is probably true of the steel-rail business
to-day.

There is a marked difference of principle between
mercantile competition, such as Ricardo had in mind, and
the competition of railroads or factories, such as we have
been considering. In the former case its action is prompt
and healthful, and does not go to extremes. If Grocer A
sells goods below cost, Grocer B need not follow him, but
simply stop selling for the time. For: i. This involves no
great present loss to B. When his receipts stop, most of
his expenses stop also. 2. It does involve a present loss
to A. If he is selling below cost, he loses more money
the more business he does. 3. It cannot continue in*
definitely. If A returns to paying prices, B can again
compete. If A continues to do business at a loss he will
become bankrupt, and B will find the field clear again.

But if Railroad A reduces charges on competitive busi-
ness, Railroad B must follow, i. It involves a great
present loss to stop. If a railroad's business shrinks to
almost nothing, a large part of its expenses run on just
the same. Interest charges accumulate ; office expenses
cannot be suddenly contracted ; repairs do not stop when
traffic shrinks ; for they are rendered necessary by weather
as well as by wear. 2. If B abandons the business, A's
reduction of rates will prove no loss. The expense of a
large business is proportionately less than that of a small
one. A rate which was below cost on 100,000 tons may
be a paying one on 200,000. 3. Profitable or not, A's
competition may be kept up indefinitely. The property
may go into bankruptcy, but the railroad stays where it

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74 RAILROAD TRANSPORTATION.

IS. It only becomes a more reckless and irresponsible
competitor.'

The competition of different stores finds a natural limit.
It brings rates down near to cost of service, and then
stops. The competition of railroads or factories finds no
such natural limit. Wherever there is a large permanent
investment, and large fixed charges, competition brings
rates down below cost of service. The competitive
business gives no money to pay repairs or interest.
Sometimes the money to pay for these things comes out
of the pockets of other customers, who do not enjoy the
benefit of the competition, and are charged much higher
rates. Then we have the worst forms of discrimination.
Sometimes the money cannot be obtained from any
customers at all. Then we have bankruptcy, ruin to the
investor, and — when these things happen on a large scale
— a commercial crisis.

There is but one way to prevent these results. If
competition is ruinous to all parties, all parties must stop
competing. If it finds no natural limit, it must be arti-
ficially limited; it must end in combination. And the
moment you have established an effective combination,
you have Introduced the principle of monopoly. You
have determined prices not in open market, but by an
agreement among all the sellers.

This agreement may take any one of four forms, i.
Agreement to maintain rates. 2. To divide the field.
3. To divide the traffic. 4. To divide the earnings. The
last three are commonly known as pools.

The first is the simplest, but least effective. There is

* Aduns, pp. 148, flF. Testimony of E. D. Worcester before the Hep-
bun Comn.ittee, p. 1074; of Albert Fink, p. 564. The counter-argument
of Mr. Blanchard. pp. 3033-34, does not hold generally, because in a fight
of this kind recklessness is the most important element of strength.

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COMPETITION AND COMBINATION. 75

scarcely an organized industry where the dealers do not
meet and settle upon a schedule of rates and discounts,
agreeing that no one shall sell below these prices. Such
agreements are rarely kept. It is for the interest of all
that rates in general should be maintained ; but it is for
the interest of each concern to secure business for itself
by not quite maintaining them. This constitutes a great
temptation to depart from schedule prices ; a temptation
all the stronger because it is so easy to violate the agree-
ment indirectly, and so hard to detect any such violation.
The result is apt to be a system of underhand competi-
tion, worse in many respects than the open competition
which existed before there was any agreement at all.

This is why it is found necessary to divide the business
among the different competitors, by a pooling agreement.
Such agreements are hard to arrange. There is almost
always a dispute about their terms. But as long as they
are in force, it is hard to violate them without actual
fraud, and it is comparatively easy to detect such viola-
tions and deal with them severely.

When it is possible to " divide the field " this course is
usually the simplest. We see it illustrated where differ-
ent gas or water companies parcel off the different dis-
tricts of a city to one another : or where manufacturers
in different cities agree to leave one another in undis-
turbed possession of the home market. We see it not
infrequently in agreements between railroads. But in the
majority of cases this arrangement is impracticable, and
the rival concerns agree upon the proportion of business
which each is to do. The companies in the Anthracite
Coal Combination have arranged how much coal each
company may mine. Factory combinations determine
how much each concern may manufacture. Railroads

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76 RAILROAD TRANSPORTATION.

agree just what percentage of competitive traffic each road
shall carr>'.

When one railroad receives more than its agreed share
of business, it is generally inconvenient to send the goods
by a rival route, and easier to arrange matters by a money
pa3rment.* This brings us to the fourth and closest form
of combination, where there is a division of earnings.
The machinery for securing this division may have any
degree of organization up to the point of actual consolida-
tion of the competing interests.

The dangers of a pool lie in the arbitrary power which
it places in the hands of a few men to deal as they will
with the business of the country. Even granting that the
actual abuses of combination are less than those of com-
petition, it seems like taking refuge from the excesses of
democracy in an enlightened despotism. There is some
slight truth in the analogy, but we are likely to carry it
too far. Combination does not produce arbitrary results
any more than competition produces uniformly beneficent
ones. We hear a great deal said about charging " what
the traffic will bear " ; and the man who avows this as his
principle is compared by anti-monopolists with the robber
barons of the middle ages. He is represented as fleecing
a helpless public out of all its hard-won earnings. In the
proper meaning of the principle the case is just the oppo-
site. Charging what the traffic will bear is a very differ-
ent thing from charging what the traffic will not bear. It
is a hard principle to apply intelligently ; but when it is
thus applied it adjusts the burdens where they can be best
borne, and develops a vast amount of business which could
not otherwise exist. Our railroad management has many

' For the question of traffic vs, money pools, see Fink : Argument
before the Select Committee of the U. S. Senate, May 21, 1885., pp. 33-35.

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COMPETITION AND COMBINATION. 77

faults and abuses in detail; but, taking its work as a
whole, it has brought down rates to a cheapness which is
unequalled elsewhere, and has developed the business of the
country on a scale which would have been impossible under
any system of rates based on cost of service. Nor does it
leave the door open for inordinate profits. The moment
a combination places its figures so high as to do this,
other capital will seek investment in the same line ; and
though these new investments are apt, before long, to
come into the pool at the old rates, yet they have cut
down the profits by their entrance. An amount of busi-
ness which would richly support one railroad or factory,
yields but a scant income to two railroads or factories at
the same rates. Witness what the " Nickel Plate ** Rail-
road has done for the Lake Shore, or the West Shore Rail-
road for the New York Central. Parallel roads do not lower
rates permanently, but they make havoc with profits. It
is usually far-sighted policy for a combination to put its
rates so low as not to tempt new capital too rapidly into
the field. If that lesson is learned, the public gets the
benefits of competition without its disadvantages. Un-
luckily, we place these combinations outside of the pro-
tection of the law, and by giving them this precarious and
almost illegal character we tempt them to seek present
gain even at the sacrifice of their own future interests.
We regard them, and we let them regard themselves, as a
means of momentary profit and speculation, instead of
recognizing them as responsible public agencies of lasting
influence and importance.'

There is another aspect of our subject, still more serious
than any we have yet treated, which we can do little more
than touch upon, — the competition and combination of

*Sc< chap. viL Grosvenor : " American Securities," pp. 200-214.

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labor. Labor is in the market, like any commodity ; its
price is largely determined by competition, and this too
often takes the form of cut-throat competition. A work-
man working for starvation wages is like a factory or a
railroad running for operating expenses. In flush times
the workman gets comparatively good wages ; he marries,
and is able to support a family in reasonable comfort.
This family becomes a fixed charge upon him ; and it is
of the utmost importance to society that he should be
able to meet his fixed charges in this respect. But a
commercial crisis comes, and the demand for labor dimin-
ishes. Men who have no family to support come into
direct competition with him. He can better afford to
work for what will keep body and soul together than not
to work at all, even though his wages are brought so low
that his children perish for lack of the food which should
give them strength to resist disease. And so wages are
brought down to the starvation minimum, only to rise
above it after long years of waiting and misery. The
workman seeks relief in combination; but combination
is far harder for him than for the capitalist. Where there
are ten factories to combine, there may be ten thousand
workmen to be held together, — not to speak of the almost
unlimited floating labor supply which may be brought in
at any point. The law will not help him. If the law re-
gards the pool with disfavor, it regards most of the mani-
festations of trades-unionism with absolute hostility.' No
wonder that our workmen try to change the law ; no
wonder they call for special statutes against labor impor-
tation ; no wonder that they seek to limit the supply
in the market by a universal eight-hour law. Whether

*W. S. Jevons: "The State in Relation to Labor," London. 1882,
chapters iv., v. J. E. Thorold Rogers : " Six Centuries of Work and Wages,"
London (and New York), 1884, pp. 398, 399.

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COMPETITION AND COMBINATION. 79

rightly or wrongly, we do" not here inquire ; it is beyond
our purpose to discuss what general impovement is prac*
ticable in this field. We only call attention to the close
relation between the two problems of starvation wages
and bankrupt competition. If capitalists and workingmen
can but see this analogy, it may help them to an under-
standing of one another's position.

The socialists, in spite of their unpractical proposals,
have the merit of seeing the close relation between these
two problems. They would solve them by organizing the
whole world into a vast system of pools and trades-unions,
under the charge of the State. This is not a rhetorical
figure; it is a statement of what the proposals of
many of them distinctly mean.' But they ignore two
overwhelming arguments against their position. One is
that government action has many bad effects, even in the
narrow sphere of duties which it to-day performs ; the
second is, that an approach to the system proposed by
the socialist has already been tried and found wanting,
under conditions far simpler than exist to-day. The or-
ganization of business in semi-political guilds was tried in
the middle ages in a great variety of places and forms.
It developed the gravest abuses, and fell with its own rot-
tenness. And yet the socialism of the mediaeval guilds
had a limited object, which was far easier to attain than
any general amelioration of the working-classes. The
guilds cared only for those who were engaged in handi-
craft. They wanted to keep craftsmen's wages high.
The great land-owners wanted to keep agricultural wages
low. Towns and lords, between them, did all they could
to prevent any one from entering a craft, and to keep him

' Gronlttnd : " The Co-operative Commonwealth," Boston, 1884, pp. 129,
145, and elsewhere.

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80 RAILROAD TRANSPORTATION.

in agriculture. The effects of this legislation upon the
rural laborer were outrageous, and he could do nothing
to help himself. The guilds were organized ; for any one
else, the least attempt at organization was a crime.*
The English combination laws, which, down to the pres-
ent century, were so infamous, were made to prevent agri-
cultural laborers from enjoying the benefits which were
granted to their oppressors. In France and Germany,
under the old regime, the case was worse than in England.
It can hardly be too much to say that ninety-nine hun-
dredths of all the state interference of this kind has been class
legislation, and that any apparent prosperity at one point,
which it has induced, has been dearly purchased at another.

While the experiments in state socialism have been so
often bad, there has been a tendency in a great many
cases to go too far to the opposite extreme, and to call
every thing bad which restricted competition in any way.
Courts and legislators have tried to stop the growth of
industrial monopoly by shutting their eyes to industrial
facts. They have tried to prohibit such combinations
altogether, the courts saying that they would not enforce
contracts in restraint of trade, the legislators trying to
render it illegal to make such contracts.

They could not stop such combinations, because they
were a necessity of business. The result of trying to pro-
hibit them was what always happens when you try to
prohibit a necessity ; the worse features of the system
were intensified. Secret combination was substituted for
open ; short-sighted and arbitrary policy was encouraged.
By prohibiting the whole system, the courts deprived
themselves of the power of dealing with specific evils, such

as secret favors, or arbitrary discriminations.

■

' Jevons, pp. 33, 34.

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COMPETITION AND COMBINATION 8l

In Europe, and especially Continental Europe, the case
is different. They prohibit most of the specific evils
strictly and effectively. But they do not prohibit pools.
They recognize them as a necessity. The railroads owned
and managed by government themselves enter into pool-
ing arrangements with those of private companies with
which they come into competition. With all the police
power which the German Government controls — a power
a hundred-fold greater than any thing we have in this
country — and with all its dread of irresponsible combina-
tions, it sees that pools are not a thing which can be pre-
vented, and that the only way to control them is to
recognize them as legal, and then hold them responsible
for any evils which may arise under their management.'

The sooner we reach the same conclusion in America,
the better for all parties concerned. The attempt to bury
the difficulties by thrusting our own heads into the sand
has already lasted too long. We must face the inevitable
as inevitable, and do the best we can to regulate it. To
meet the difficulties successfully will be a hard problem.
But to evade them has proved an impossible one.*

' See chap. xiii. See also R, R, Gazette^ 1884, p. 636.

• T. M. Cooley : ** Popular and Legal Views of Traffic Pooling." Chicago.
1884. This pamphlet, originally published as an article in the Railway
Review^ is a work of great value.

In the case of The Central Trust Co. vs. The Ohio Central Railroad Co.,
the U. S. Circuit Court has just rendered a decision enforcing pooling con-
tiacts under certain circumstances. Both the decision itself, and the aigu-
iBCntof Mr. Stevenson Burke, a»e v\'or»hv of careful attention.

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CHAPTER V.

COMPETITION AND COMBINATION IN PRACTICE.

Early railroad consolidation — Scott — Vanderbilt — The trunk-line systems-
Railroad geography of the United States — Means of handling through
traffic — Fast freight lines — ^Advantages and disadvantages — Struggles for
competitive traffic — Railroad pools in the West ; in the South — Trunk-
line wars — Contests between cities — Arrangements made in 1877-79 —
Effect upon water routes — Railroad war of 1881 — Principles involved-
Present state of affairs.

Charles Francis Adams, Jr. : '* Railroads and Railroad Questions," New
York, 1878, pp. 148-213. (Also issued under the title '* Railroads, their
Origin and Problems.'*)

Reports of Joseph Nimmo, Jr., Chief of the Bureau of Statistics, on the
Internal Commerce of the United States — especially that for 1879.

Report of the Special Committee on Railroads, appointed under a resolu^
tion of the N. Y. Assembly, Feb. 28, 1879.

This is commonly known as the Hepburn Committee Report. The 5,000
pages of testimony form by far the best authority on certain matters of rail-
road management which has ever appeared in print. The most valuable part
is the testimony of G. R. Blanchard, who represented the management of the
Erie Railway. Mr Blanchard's other utterances on the subject are also im-
portant.

Albert Fink's successive reports and arguments before legislative committees
furnish material of the highest value. For many other authorities dealing
more or less directly with this subject, see next chapter.

The principles dealt with in the last chapter have been
developed at some length, because they are necessary to
any true understanding of recent railroad history, or to
any intelligent judgment on matters of railroad legislation.

It is only in the last few years that they have become
thus important. The earlier railroad combinations could

d2

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COMPETITION AND COMBINATION. 83

be easily understood without them. These earlier com-
binations were for the most part mere consolidations of
different links into one connecting line. Take, for in-
stance, the growth of the Vanderbilt system. In 1853 the
New York Central was formed by the consolidation of
what had been originally eleven railroads: Albany and
Schenectady, Schenectady and Troy, Utica and Schenec-
tady, Syracuse and Utica, Auburn and Syracuse, Auburn
and Rochester, Rochester and Syracuse direct, Rochester,
Lockport, and Niagara Falls, Buffalo and Lockport, Tona-
wanda, Attica, and Buffalo. From 1855 to 1858, the
system thus formed gained control of five more roads:
Rochester and Lake Ontario, Buffalo and Niagara Falls,
Lewiston, Athens Branch, Niagara Bridge and Canan-
daigua. Then came Vanderbilt's achievements : the union
with the Hudson River Railroad and the Harlem on the
the east ; and (in some sense) with the Lake Shore and
Michigan Southern, the Canada Southern, the Michigan
Central, the New York, Chicago and St. Louis, on the
west ; the whole system including more than four thousand
miles of line.

This is simply one instance among many. If we trace
back the history of almost any of our large railroads we
find that they were formed by the consolidation of many
smaller ones. Such a course of events was a necessity.
As long as railroads were purely local affairs, each locality
might charter and run its own. The moment any large
through traffic grew up, this was found to be a wasteful
way of doing business. If they changed cars at every
point of junction, the expenses were vastly increased. If
they did not change cars, there was still the awkwardness
of dividing responsibility, and the evil of having two sep-
arate organizations where one would do the work better.

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84 RAILROAD TRANSPORTATION,

It required no special training to see the necessity of such
consolidation, and no extraordinary business talent to
carry it through.

But there was a point beyond which these matters did
not take care of themselves, and could only be managed
by great leaders. The trunk lines of the country reached
this point about twenty years ago. At that time the
main routes were pretty well consolidated as far as the
Ohio River or the eastern end of Lake Erie; for their
through connections to Chicago or St. Louis, they made
use of independent roads. The men who did most to
change this state of things were Cornelius Vanderbilt and
Thomas Alexander Scott. Scott began earlier and went
farther ; but there was a dashing quality about Vander-
bilt's doings which make him the central figure in this
movement.

Scott entered the service of the Pennsylvania Rail-
road in 1850. He was rapidly promoted and soon made
his influence felt in the policy of the road. In i860 he
became Vice-President chiefly through the exertions of J.
Edgar Thomson, who gave him active support in all his
projects. They had already secured possession of the
Philadelphia and Erie, and were busy with other schemes
of the same sort, when the war interrupted all these plans.
At the close of the war they were pushed on with
renewed activity ; the system was extended westward to
Chicago, St. Louis, and Cincinnati, southward to Balti-
more, eastward all over New Jersey, and northward as far
as Lake Ontario. Scott himself went far beyond these
limits, and was personally brought into financial trouble
in 1873 in connection with the Texas Pacific. These
things did not, however, involve the company, nor did
they interfere with his position at its head. On the death

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COMPETITION AND COMBINATION. 85

of Thomson in 1874, Scott was elected president and held
this position till 1880, a year before his death. As a
result of his policy, the Pennsylvania Railroad and its
alter ego the Pennsylvania Company, together control
nearly seven thousand miles of the most valuable railroad
property in the United States.

Vanderbilt was thirty years older than Scott, but he did
not go into railroad business until several years later than
his rival. Through his early life he had been a steamboat
captain, and in the years 1 850-1 860 he was one of the
foremost steamboat owners in the world. But his busi-
ness sagacity led him to foresee the future of the railroad
system ; and about the beginning of the war he gradually
withdrew from the sea, to invest his capital on land. In
1863 he began buying Harlem as an investment. He
bought some of it at .03 ; thanks to the operations of
those who tried to break him down by selling it short, he
carried it up to 285. He went into Hudson River in
1864; in 1867, after some opposition, he secured control
of the New York Central, and consolidated it with the
Hudson River Railroad in 1869. In a desperate attempt
to gain control of Erie he was foiled; but he and his
friends were more successful in their efforts further west,
on the Lake Shore and the Canadian roads. There were
thus finally united under one general management (though
not under one concern as in the Pennsylvania system)
some four thousand miles of railroad between New York
and Chicago.

Parallel to these, but more slowly, were developed three
other trunk-line systems — the Grand Trunk on the north,
the Erie in the middle, and the Baltimore and Ohio on
the south. The early development of these systems had
been to a certain extent retarded — in the case of the

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86 RAILROAD TRANSPORTATiOlT.

Grand Trunk by disadvantages of situation, in the case of
the Erie by speculative management, in the case of the
Baltimore and Ohio by the war. But though not equal
in strength to the systems first named, each of these
controls from two thousand to three thousand miles of
line between the seaboard and the Mississippi valley.
The tendency toward consolidation on parallel lines is
the distinctive feature of railroad geography in this part
of the country. The West Shore, the Lackawanna, the
Chesapeake and Ohio, are instances of this which have
come up within the last few years. Certain systems
between the Lakes and the Ohio River, like the Cleve-
land, Columbus, Cincinnati, and Indianapolis, resist the
tendency, but find it hard work to do so. West of
Chicago and St. Louis the rival lines do not run parallel,
but radiate from common centres. They reach out in all
directions to collect grain for the great western markets.
From Chicago we have, beginning on the north, first the
St. Paul, and then the Northwestern system, each with
about five thousand miles of line, then the Rock Island
with fifteen hundred, the Chicago, Burlington, and Quincy
with four thousand, the Chicago and Alton with about
one thousand, and the Illinois Central with two thousand.
These systems have grown and consolidated even more
rapidly than the trunk lines. From St. Louis we have
the same sort of radiation, only here one company, the
Missouri Pacific, has become overwhelmingly strong, and
controls six thousand miles, or, with the closely allied
Wabash system, ninety-five hundred miles. Farther to
the west, beyond the Missouri River, parallel lines of trans*
continental traffic again take the place of radiating ones.
It is, however, too soon to tell what shape these systems
in the extreme West will finally take, and whether we may
not have a gigantic general consolidation of all lines.

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COMPETITION AND COMBINATION. 8/

In the States south of the Potomac and east of the
Ohio, the western form of railroad geography is reversed.
Instead of railroads radiating front the central markets
toward the points of production, the points of production
are in the centre and the markets lie all around the edge
of the district — on the seaboard, the Gulf, the Mississippi,
or the Ohio. There is an inward radiation instead of an
outward one.* In the Northeastern States consolidation
has not taken place on nearly so large a scale as in other
parts of the country, and especially not on as long lines.
There has been consolidation by districts, rather than con-
solidation into extended systems.

The efforts to secure unity of management in certain
details went far beyond the limits of actual consolidation.
This unity was most necessary in the handling of through
passengers and freight. To transship frequently, in-
volved great trouble and expense. On the other hand,
for a road to let its own cars pass on to other lines without
any one to look after them, involved the danger of serious
loss. The first solution tried on a large scale was to ac-
commodate the through traffic by special cars, owned and
looked after by a company which was, at least nominally,
quite distinct from any of the railroads over which the
cars were run. Thus there grew up sleeping-car companies,
express companies, or freight-transportation companies.

In the passenger and express business, the system has
continued till the present day. The express company owns
the cars and assumes the responsibility to the public ; it
runs its cars under a contract with each railroad.* The

* The strongest individual system in this district is the Louisville and Nash-
ville, which with its affiliated lines includes over three thousand miles of
road.

* These contracts take the most varied forms. U. S. Census, z88o, voL
iv.i pp. 594-612 (bottom figures).

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88 RAILROAD TRANSPORTATION.

sleeping-car arrangements have the same general form ; on
their face they are usually more unfavorable to the rail-
road. But the through-freight business has gradually
taken a different shape. The earliest form of fast-freight
line was organized like an express company — it owned the
cars, assumed the responsibility, collected all it could from
the public, and paid the railroads a car-load rate very much
smaller than what it charged the public. Some of these
lines still exist — the Merchants Despatch Transportation
Company is an important instance. But it was found that
these lines afforded great opportunities for corruption.
The directors of railroads would buy stock in the trans-
portation company, and then give this company a contract
which enriched it (and them) at the expense of the stock-
holders whose interests were entrusted to their charge.
An effort was made to avoid these abuses, by paying the
freight charges to the railroads, and giving the transporta-
tion company a certain percentage as its commission.
This was only partially successful.'

A much more useful device was the co-operative fast-
freight line,* which avoids the abuses of the old system,
and now prevails all but universally. It avoids all steal-
ing, because there is nothing to steal. A co-operative
freight line has very few expenses, and no earnings at all.
It is nothing more than a system of looking after cars and
keeping accounts. The principle is this : Each road con-
nected with the line sets apart a certain number of cars for
line freight. It marks them with some distinguishing

> Hepburn Committee Report, p. 9, testimony (Blanchard), pp. 2959-62.

• Hepburn Committee Report, p. 8, testimony, p. 2963 ff.

Testimony before U. S. Senate Com. on Transp. Routes to the Seaboard,
43d Cong., I Sess., 307, part 2, pp. 360-65.

J. D. Hayes in U. S. Internal Commerce Report, 1876-77, Appendix,
pp. 49-6a

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COMPETITION AND COMBINATION 89

color or mark, but continues to own them. Each road
lets the line cars of other roads pass freely over its own
track without transshipment. It collects the transporta-
tion charges on its own part of the route, no matter whose
the cars may be. It reports the movements of the cars to
the central office of the line. In the accounts of this
office, a certain sum * (say j- cts. per mile run) is charged
c^ainst the road for the use of the cars of other roads on
its own line ; and it is credited with a like amount for
every mile that its cars have been used on other roads.
The fast-freight line thus acts as a car-clearing house to
settle debits and credits for the use of the cars of other
roads.' It cannot be made a means of fraud, any more
than a clearing-house can be made a means of fraud. It
has no receipts of its own. The sum of the debit balances
for one set of roads must equal the sum of the credit
balances for the rest, leaving the line itself neither the
gainer nor the loser. Only in case of loss or damage
does the freight line receive money not due to some other
road or roads ; and the money thus received is, of course,
paid out to the shipper. The only real payments to the
line as such, are paid to be spent for salaries and office ex-
penses. As for the line itself, it is neither a corporation
nor a partnership. It is simply a set of arrangements for
carrying out certain contracts between several railroads.
The very agents of the line, in their dealings with the
public, are responsible only for some specific road or
roads, and not for the line as such.

This total absence of all possibility of cheating caused
the cooperative freight line to grow rapidly in favor. The

' Varying according to the condition of the track — ^largest in the South,
smallest on the trunk lines.

* The New England Car Clearing-House in Boston does the same sort of
work under more complicated conditions*

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90 RAILROAD TRANSPORTATION.

Erie road reduced the expense of looking after through
freight from about nine per cent of the earnings on such
freight (its previous figure) to three per cent. This was
done by simply changing from the old form of freight line
to the cooperative form.*

This is the great advantage of the cooperative freight
line system. It also has the advantage that it causes the
rolling stock to be rapidly utilized. The disadvantages of
the system lie in the lack of responsibility, due to the ex-
tremely loose character of the agreements under which
the freight line is managed. The absence of any power
which can steal involves the absence of any power which
can be held responsible for damages or abuses. The
shippers feel this evil quite constantly.' The railroads
themselves feel it occasionally. The through freight of a
railroad may be dependent upon the discretion of the
soliciting agents of a fast-freight line, — agents living per-
haps a thousand miles away. These agents are responsi-
ble to no authority except that of their own roads. Yet
on their uncontrolled discretion — or indiscretion — the
policy and the prosperity of distant lines may become ab-
solutely dependent. This is strongly felt in the case of
great railroad wars ; it is perhaps the most fruitful cause
of such wars."

Thus the very means which bound connecting roads
more closely together only caused a sharper rivalry be-
tween different systems which were not thus bound.
Railroad wars became more and more severe. As long as
the competitive gtrife was merely local, it was of but

" Blanchard : Test, before Sen. Com. on Transp. Routes (1873), p. 364.

" Proceedings of the New York Board of Trade and Transportation, 1884,
pp. 32-42.

" For the effect of irresponsible freight agents in causing railroad wars, see
Hepburn Com. Testimony, pp. 520, 522 (Fink), 3007 ff. (Blanchard).

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COMPETITION AND COMBINATION 9I

trifling importance. When it extended over thousands of
miles, and involved millions of tons of freight movement
—not to say millions of dollars loss to stockholders — it
became a matter of national concern. Such wars could
only end in consolidation or pooling ; and as the railroad
systems themselves became larger, public interest in rail-
road pools rapidly increased.

The earliest railroad pools were probably developed in
New England, but they were on a small scale, and the
whole thing was often so quietly done that their very ex-
istence was almost unsuspected. The first railroad pool
which has had an important public history was the Chi-
cago-Omaha pool, established in 1870.* Chicago and
Omaha were connected by three roads, almost exactly
equal in length, and not far different from one another in
financial resources. Their through business was so im-
portant that they could not afford to reduce rates to a
cut-throat point. An equal division was so obviously
fair that it was maintained for many years without much
bickering. As long as the original conditions remained
the same, there was little trouble. The pool went through
the Granger movement unshaken. It was subsequently
joined by other roads. Its original form was broken up in
1884, because the systems which composed it had out-
grown the limits to which the old framework could be
stretched. But the principle was by no means abandoned.
Each year had seen it more and more widely extended.
A Southwestern Association, dealing with the traffic of
St. Louis as well as of Chicago, was established in 1876, and
had an important though somewhat checkered career.'
Pools were established from Chicago to the Ohio River on

* U. S. Internal Commerce Report, 1879, pp. 175 ff.

' Intern. Com. Rep., 1879, p. 174 ; Appendix, pp. 51, 52.

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92 RAILROAD TRANSPORTATION,

the southeast, and to Minnesota on the northwest, while
beyond the Missouri they were extended to include the
traffic of Colorado and other southwestern points, and
finally the trans-continental traffic as far as the Pacific
coast itself.

Not quite so extensive, but far more completely deveU
oped, were the pooling arrangements in the country south
of the Potomac and the Ohio.* The competition in cer-
tain districts of the South had been even more reckless
and ruinous than elsewhere. A few railroads in Georgia
attempted (1873) to avoid these evils by combination.
Out of this attempt grew the Southern Railway and
Steamship Association. It was well managed from the
first, and within three years from its organization it had
come to include nearly the whole railroad system of the
South and a large number of connecting or competing
steamship lines. It was nominally a " net money pool,"
that is to say, any road carrying more than its share of
the through traffic paid its rivals the excess receipts, less
a certain allowance for expenses of carrying ; but this
allowance for expenses was purposely made too small, in
order to take away from the roads all inducements to run
ahead of their percentages. But the Southern Associa-
tion was something more than a mere system of pooling
contracts. Its object was not simply to settle what shares
of competitive traffic each line should carry, but also to
facilitate the handling of through traffic. This it did by-
establishing bases of classification, rates, etc. ; but above
all by the establishment (1875) of a clearing house to settle
the through-traffic accounts. All these things were done
after discussion by an advisory board consisting of one
delegate from each railroad ; but the executive officer was

' Fink, in U. S. Internal Commerce Report, 1876, Appendix, pp. 12-24.

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COMPETITION AND COMBINATION 93

not bound by the opinion of the majority. The man who
organized the association, and acted as its executive officer
until called to a wider field of activity, was Albert Fink.

The necessity for trunk-line pools did not arise until the
heavy trunk-line traffic was developed. For a long time
this was relatively unimportant, because so much was car-
ried by water. The Lakes, the Erie Canal, and the Hud-
son River formed an unrivalled line of transportation to
the east. The Mississippi River on the south was almost
equally efficient. When it cost the railroads two cents a
mile to transport a ton of freight, the long-distance freight
went by water as a matter of course. Only on the higher
class of goods, where speed was quite as important as
economy, could the railroads compete with decided advan-
tage when the canals were open.

But a series of changes ' made it possible for the rail-
roads to compete for this through traffic ; and the moment
they undertook to do so they found it a prize worth
fighting for. These wars on a large scale began in 1869,
when the New York Central and the Pennsylvania each
had obtained virtual control of its Chicago connection.'
In 1868 rates from Chicago to New York stood at $1.88
per 100 pounds for first-class goods, and $0.82 for fourth-
class. In the summer of 1869 they fell, under the stress
of competition, to a common rate of $0.25 per 100 pounds
on all classes. With railroad methods as they existed at
the time, such a reduction could not be maintained, and
in the following years (i 870-74) they were at least nominally
kept at figures of $i.oo-$i.5o for first-class, and $o.6o-$o.8o
for fourth. But in the year 1874 a new element of dis-

* See chap. vi.

* "Statistics Concerning the Movement of East-bound and West-bound
Traffic over the Trunk Lines and Connecting Roads." New York, 1884.

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94 RAILROAD TRANSPORTATION.

turbance appeared.' The Baltimore and Ohio secured its
Chicago connection, and almost immediately afterward
the Grand Trunk began operations as a competitor on a
line connecting Milwaukee and Detroit with the northern
Atlantic ports. The efforts of the New York Central and
Pennsylvania systems to maintain rates were rendered of
no effect by the recklessness of the Grand Trunk and the
offishness of the Baltimore and Ohio ; while the bank-
rupt condition of the Erie made it almost impossible for
it to pursue a conservative policy in these matters. The
year 1875 was passed in feverish excitement; 1876 saw
the beginning of a wild railroad war. First-class rates
were quoted at 25 cts. per hundred, fourth class at i6cts.;
actual rates went much lower.

It is needless to say that railroad profits fell rapidly.
But the effects went far outside the circle of railroad stock-
holders. The canal lost business, and the reduction of
tolls which was hurriedly made could not prevent this
loss.' The canal was no longer the dominant power which
it once had been. And this loss of importance of the
canal was a relative loss of importance to New York City.
As long as the canal was distinctly the best route, the port
of New York had a kind of monopoly; and. the owners
of the various monopoly rights used them remorselessly.
High charges were imposed, vexatious and uneconomical
ways of doing business were enforced. When Baltimore,
Philadelphia, and Boston became competitors, traffic at
those points was burdened with no such restrictions.'
Every facility was afforded for handling the through trade

* Adams, *' Railroads," pp. 154 ff.

■ Compare Fink : Rep. on Adjustment of R. R. Transp. Rates (N. Y.,
1882), p. 40.

• Hepburn Com. Rep., pp. 22-26. Compare W. N. Black : ** Storage and
Transportation in the Port of New York," 1884.

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COMPETITION AND COMBINATION, 95

cheaply. Under these circumstances their commerce
grew rapidly, while that of New York did not. To the
fight between railroads was thus added a fight between
cities, which gave new intensity to the contest.

The fight ended in 1877, ^^^ because any thing was
settled, but because all parties were exhausted. As be-
tween the different cities it resulted in a compromise.
Philadelphia was given a small advantage over New York
in the matter of rates from the West, Baltimore a still
smaller advantage over Philadelphia. That any difference
at all should be allowed was a concession on the part of
the New York roads ; but the differences were much less
than those for which Baltimore and Philadelphia had been
contending.

On the part of the railroads the results were more
definite. They not only stopped fighting, but they made
arrangements to prevent such fighting in future by pools.
Trunk-line pools had not been quite unknown * ; but they
had generally been managed by outside parties ' (eveners),
in such a way as to intensify the abuses to which the sys-
tem was liable. Now the roads took the matter in hand
themselves. The division of west-bound traflSc was ar-
ranged in 1877. The east-bound pooling arrangements
were more complicated, owing to the number of initial
points of shipment ; and it was two years before they
could arrange any division at all. Meantime, an associa-

* The Anthracite Coal Combination was the earliest instance. It was
undertaken by the roads as mine-owners rather than as caniers. It was
strongest in the years 1872-76. It aimed to limit production, not merely to
divide it. The combination owned about 75 per cent, of the anthracite coal
fields. Its measures against independent mine-owners were extremely op-
pressive. For dates etc., see Int. Com. Rep., 1879, pp. 179-182.

■ Hepburn Com. Test. (Blanchard), pp. 331 5 ff. Int. Com. Rep., 1879, P«
177. The Standard Oil Co. was the worst instance. The system of cattle even-
ers was as bad in principle, but was never carried out with the same power.

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96 RAILROAD TRANSPORTATION.

tion^ something like that of the southern roads, had been
formed by the trunk lines and their connections, under the
title of the Joint Executive Committee. Albert Fink was
at its head. It never attained the thoroughness of or-
ganization which there has been in the South. There was
no clearing-house system, and no means of forming pool-
ing contracts by any central authority — only by the volun-
tary action of the roads in each individual case.' We
thus had three distinct sets of arrangements, i. As to
differentials between cities. 2. As to percentages of
traffic between trunk-lines. 3. As to general business ar-
rangements, rates, etc., under the Joint Executive Com-
mittee.

One result of this settlement was an increase of traffic
by water. The business of the Mississippi River, stimu-
lated as it was by the construction of the jetties at its
mouth, grew enormously.* Even the traffic of the Erie
Canal revived for the time being. The advantage during
these years was in favor of New York as compared with
Baltimore, or as compared with any other port except
New Orleans. But the people of New York were not satis-
fied. They were displeased at what seemed to increase
the arbitrary power of the railroads ; and the result of
their dissatisfaction was the appointment of a Committee
of the New York Assembly — commonly known as the
Hepburn Committee — " to investigate alleged abuses in
railroad management." They brought to light abuses
enough ; but the general drift of the evidence showed un-
mistakably that the pooling system, under the administra-

* Hepburn Com. Testimony, pp. 3120 ££, (Blanchard).
Fink : ** The Railroad Problem and its Solution," 1880.

* Internal Commerce Report, 188 1, pp. 48 ff. The exports of grain and
flour at New Orleans increased from less than one million bushels in 1875 to
over twelve million in 1880.

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COMPETITIOI/ AND COMBINATION. 9/

tion of Mr. Fink, had lessened rather than increased those
abuses.'

Still the New York merchants believed that the exist-
ing arrangements as to differential rates did not do them
justice ; and the railroads leading to New York appear to
have shared this belief. At any rate, the agreement was
terminated in the year 1881, by action of the New York
Central " ; and a fierce railroad war raged for eight months
afterward. It did not involve as great a reduction of divi-
dends as has sometimes been the case, because general
business was prosperous and prices were high ; but the re-
duction in rates was very great. The railroad organiza-
tion was quite powerless to stop this fight. An effort was
made to have recourse to arbitration ; and Messrs. Thur-
man, Washburne, and Cooley were appointed an advisory
committee on the subject. Their report was interesting,
but it settled nothing. They showed clearly enough how
Baltimore claimed that rates ought to be based on dis-
tance, while New York based her claims for equality on the
advantage of the New York Central in matter of grades.
The committee showed the fallacy of some of these points,
but they could not show any principle on which the matter
should be decided." Meantime Mr. Fink had been study-
ing the subject, with more definite results. If he did not
solve the question, he at any rate did a great deal toward
clearing it up.* He showed that the violence of the com-

' This is candidly admitted by Simon Sterne himself, although he was pro-
fessionally employed by the complainants before the committee.

' Fink : ** Report on Adjustment of R. R. Transp. Rates," 1883, pp. 6, 7.

' Report of Messrs. Thurman, Washburne, and Cooley, an Advisory Com-
mission on Differential Rates, etc. N. Y., 1882.

^ The " Report on the Adjustment of Transportation Rates to the Sea-
board," already cited, is one of the most successful applications ever made of
mathematical methods to social phenomena. It ought to give Mr. Fink as

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98 RAILROAD TRANSPORTATION.

petition between the seaboard cities, was due to the fact
that they were simply intermediate points on the route
between Chicago and Liverpool, or some other European
port. Of this whole route the railroad formed one part,
the water route across the Atlantic the other. He further
showed how ocean rates adapted themselves to rail rates,
so that the rate Chicago — New YoxVplus New York — Liv-
erpool was almost exactly equal to the rate Chicago — Balti-
more plus Baltimore — Liverpool.* This being the case, the
amount of traffic at each port was regulated by the harbor
and warehouse facilities in each case ; and as long as the
differentials were not grossly unfair, matters would adjust
themselves.'

Matters finally settled back on the same general arrange-
ment as before. But one thing became clear. The water
routes could not compete with the railroads at the rail-
roads' war rates. The railroad war of 1 88 1-2 had checked
the development of Mississippi River traffic, and had rapidly
cut into that of the Erie Canal. The complete abolition of
tolls on the latter was almost a matter .of neeessity ; and,
when it came, it did not suffice to protect the canal
business in the face of a renewed railroad war.

For the peace of 1882 was of shorter duration than its
predecessor; and the war which began in 1884 was, in
many respects, a more serious one. It was no longer a

high a rank among scientific investigators, as he holds among practical men.
Unfortunately, it is so abstruse that very few people take the time to do it
justice.

* If the goods transported by the Central or Erie alone were considered,
New York suffers a very slight disadvantage as compared with Baltimore. But
if we take into account the canal rates, New York has a slight advantage.

' The legitimate inference from Fink's arguments is, that the differential
rate ought exactly to counterbalance the difference in cost of ocean carriage,
if things are to be adjusted on a theoretically correct basis ; but that, practi-
cally, things will quickly adjust themselves to any basis whatever.

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COMPETITION AND COMBINATION 99

conflict between cities, but between railroads — and an
aggravated one at that, because some of the roads had
been built for speculative purposes. In some respects it
was a repetition of the events of ten years before ; only
now the West Shore, the Lackawanna, and the Chesa-
peake and Ohio had taken the place occupied ten years
before by the Grand Trunk, the Erie, and the Baltimore
and Ohio. It is too early [July i, 1885] to predict the
outcome of the existing war. But it is a mere truism to
say that it must end in combination in some form. It is
all very well to talk of free competition and survival of the
fittest. But permanent competition is virtually out of the
question. And survival of the fittest is only possible
when the unfittest can be physically removed — a thing
which is impossible in the case of an unfit trunk line.
The lion and the lamb must lie down together. The
only questions are, first, how long before this state of
things is to come about ; and second, whether the lion is
to lie down outside of the lamb.'

' As we go to press these questions seem to be rapidly settling themselveii.

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CHAPTER VI.

RAILROAD CHARGES AND DISCRIMINATIONS.

Profits of railroads in the United States — General scale of freight charges-
Reduction in the past fifteen years — Effect of steel rails — Improvements
in railroad economy — Back-loading — How discrimination arises — Charg-
ing what the traffic will bear — Different views regarding the system-
Classification — Local discriminations — Cases where they are a necessary
evil — Personal discrimination — Evil results of the system — Short-sighted
policy on the part of certain railroads — Effect of the financial condition
of different companies — General conclusions.

Edward Atkinson : " The Railway, the Farmer, and the Public." Issued
in book form in "The Distribution of Products," New York, 1885, pp.
229-303.

E. Lavoinne and E. Pontzen: *'Les Chemins de Fer en Amerique,"
Paris, 1882 ; vol. ii., pp. 334-382.

See also references at the beginning of the preceding chapter, especially
the Hepburn Committee Report and Testimony.

The number of pamphlets on the subject is enormous. The works of
Albert Fink on the one hand, and of Simon Sterne on the other, are good
representatives of the intelligent aigument on either side. In some respects
the best thing which has been written on the subject is by E. P. Vining :
** The Necessity for a Classification of Freight, and the Principles on Which
it is Based," which originally appeared in the Railway Review (Chicago),
Oct. 18, 1884.

For works regarding European practice and principles, see chap. xiii.

The average man troubles himself very little about the
speculative management of corporations, or about their
character as industrial monopolies. What he wants to
know is whether they are charging him too high a price
for their services. Nine tenths of the complaint and of
the proposed legislation deals with this point. Some say

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RAILROAD CHARGES AND DISCRIMINATIONS. lOI

that corporations are making too much money. Others
say that their charges in general are too high. A still
more frequent ground of complaint is that the charges
are irregular, and involve discrimination — that is, that
some charges are made higher than others without any
good reason for the difference, and that such discrimi-
nation is ruinous to the less favored customers, and dan-
gerous to the interests of the public.

The first two complaints, of high profits and high
charges, are generally false. The third, concerning dis-
crimination, is, unfortunately, true.

I. — The statement that corporations make too much
money is scarcely borne out by the facts. The average re-
turn of the railroads in this country is under four per
cent., the bondholders receiving an average of four and a
half per cent., the stockholders of two and a half per
cent. True, much of the stock is " water," not represent-
ing any capital actually expended ; but even making allow-
ance for this, it is hardly probable that the roads are
earning more than five per cent, on the total investment.
This assumes an average cost of $45,000 per mile, imply-
ing that about half the stock and one sixth of the bonds
are " water." Some authorities * of deservedly high repute
place the true cost lower; but their methods are not above
criticism.

" For instance, Poor (" Manual of Railroads of the United States," 18S4)
is disposed to take the position that about half of the nominal capital is
water. The whole question is an extremely difficult one. There are three
ways of estimating the probable cost of a railroad. The first is to take the
account of stock and debt, and make deductions for amount not paid in cash.
The second is to estimate directly the probable cost of duplication of such
road. The third is to take another road as nearly like it as possible, which
is admitted to have been honestly managed, and see what has been the cost
in that case. This is by far the best method, where we can apply it. The
two first methods give results much too small : the first, because we can rarely

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I02 RAILROAD TRANSPORTATION.

But it IS objected that, even if the average profit below,
the profit of certain concerns is extremely high. Granted.
But so it is in other lines of business, and so it must be in
any business. If there is much risk of complete failure,
there must be chance of large gain to offset it. The effort
to prevent exorbitant profits, by limiting the amount
which a company may divide among its stockholders, is
of little use. It is generally evaded by " stock-watering **
— that is, by a distribution among the stockholders of
new stock, which costs them little or nothing, and on
which they can receive dividends. But even if the law is
obeyed, and there is no attempt at stock-watering, the
public rarely gains any advantage from it. If a company
is not allowed to divide its whole net income, the man-
agers will not reduce rates. They will find it easier to in-
crease expenses. Or they may choose to do a small
business at high rates, instead of a large business at
moderate rates. To forbid a corporation to increase its
profits is to encourage waste and discourage enterprise.
The principle of limitation of dividend, though fondly
clung to by many of our legislators, cannot be considered

make allowance for earnings which have been spent in construction; the
second, because it takes no proper account of " incidentals," an enormous
item of expense in any large undertaking. It is often said, on the basis of
the first or second of these methods, that any thing above $30,000 per mile
for the United States is water. But if we try to make any comparison with
other countries, we shall find these figures too low. The only country whose
railroads have cost any thing like as low a figure per mile is Sweden (see
Appendix). The cost there is given at $30,000. But the Swedish roads are
built for very light traffic at slow rates of speed ; the country is an easy one
for railroad engineering ; land, labor, and materials are all exceedingly cheap.
It is not fair to our roads to make this the standard of comparison.

The explanation of the discrepancy probably is that it is imposssible to
adapt roads in advance to the exact use which is afterward made of them ;
and that the changes thus rendered necessary form an item of incidental ex-
pense so universal that it is fair to reckon it as part of the cost.

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RAILROAD CHARGES AND DISCRIMINA TIONS. IO3

a good one.* A judiciously arranged tax system will
answer the purpose better.

Where there is not a natural monopoly — that is, in the
vast mass of cases — competition will generally do this
part of the work. Where the profits of an existing con-
cern are high enough to tempt it, a competitor will come
into the field. There will ultimately be combination, and
no reduction of prices ; but there will be a reduction of
profits, and a large one. The business which would sup-
port one concern richly, will not do the same for two, no
matter how much they combine, or what rates they try to
make.'

II. — If railroad profits are not too high, the charge that
railroad prices in general are too high loses all its plausi-
bility.

If it is said that railroad rates in general are too high,
any one of three things may be meant : either that the
rates give too high a profit ; or that they prevent the de-
velopment of business ; or that they are higher than in
other countries. The first of these points we have already
considered. As to the second ; — nowhere have railroads
done so much to develop business as in the United States,
and nowhere has the actual development been more rapid.
Mr. Atkinson ' has shown how the transportation charges
have become an insignificant element in the price of prod-
ucts. The cost of delivering bread from the baker to his

^ See pp. 55, 126. T. H. Farrer : " The State in its Relation to Trade,"
pp. 88-90.

" It is fair to 5ay that the existence of roads like the West Shore is due to
the effort of the managers of the Central to earn dividends on watered stock.
But it is not fair to infer that, if the dividends of the Central had been lim-
ited by law, and the stock-watering prevented, the policy of the road would
have been so changed as to remove the inducements to build a parallel line.

• '* The Distribution of Products." pp. 292-295.

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I04r RAILROAD TRANSPORTATIOI^.

customers is a larger element in the price of bread than
the cost of getting wheat from the farmer to the miller,
and flour from the miller to the baker — though the one is
but a few hundreds of yards, and the other as many hun-
dreds of miles.

As to the comparison with other countries : — Railroad
charges in the United States average but a cent and a
quarter per ton per mile. In 1884 they fell to a cent and
one eighth. This is lower than they are anywhere else in
the world/ and lower than would have been deemed pes*
sible a few years since. It is hard to compare our present
average rates with those of fifteen years ago, because at
that time no general statistics were collected. But it vs
safe to say that they have been reduced 50 per cent,
nominal, or, making allowance for the gold premium ip
1870, 35 per cent, actual." In 1876 the average rates pef
ton per mile on the roads of New York State were i.7cts.;
now they are about 0.8 cts. Then the average rates in
Ohio were 2.4 cts.; now they are less than 0.9 cts. In th^
year 1869 the earnings, expenses, and profits of the N. Y.
Central per ton per mile were 2.4, 1.4, i.o cts. respectively;
for the last five years they have averaged about 0.8,
0.6, and 6.2 cts.

Any full statement of the means by which this reduc-
tion was brought about would belong to a more technical
treatise than this book is intended to be. When it is said
that it was due to competition, it is in a certain sense
true ; only it requires further explanation to show how
the whole rate now should be so much less than the mere

* This is only true of freight rates. Our average passenger charge is
2.35 cts. per mile, while that of most European countries varies from 1.3 to 2
cts. But passenger charges are a much less important matter than freight
charges.

■ " The Distribution of Products," pp. 240 ff.

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RAILROAD CHARGES AND DISCRIMINATIONS. 10$

cost a few years ago. The reduction in cost is more re-
markable than the reduction in rates. A part of this re-
duction is due to the mere growth of the country, offering
a larger traffic, and enabling the railroad to utilize its
facilities more fully. A part is due to consolidation,
whether partial or complete, by which connecting roads
have been enabled to administer their affairs more eco-
nomically. But the most remarkable part of the change
has been due to a system of improved methods of hand-
ling the traffic itself.'

The history of these changes begins about 1867. At
that time matters seemed to be approaching a stationary
state as far as any reduction in railroad charges was con-
cerned. Reductions in rates are usually made by the desire
of railroads to develop business. But at existing rates,
many roads then had little inducement to develop their
business very much. They already had all that their track
would carry. Iron rails had been deteriorating in quality
— under heavy traffic they required constant renewal in
order to avoid the most serious dangers of accident.

It was at this juncture that Bessemer steel came into
use. It was not a sudden invention. Bessemer was sim-
ply one among several others (Siemens, Mushet, Holley)
who steadily improved the methods of producing steel
cheaply.' The result of the employment of steel was little
short of a revolution in railroad business methods. This
was, however, an indirect result rather than a direct one.
This fact is often misunderstood. At the worst the per-

' See an excellent paper by Wm. P. Shinn, in U. S. Internal Commerce
Rep., 1882, Appendix, pp. 294-305.

* The result of their labors will be seen by the following table :
Price of rails per ton 1868 1872 1876 1880 1884

Bessemer steel . $158 $112 $59 $67 $31

Iron ... 79 85 41 49 —

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I06 RAILROAD TRANSPORTATION.

centage of expense due to repairs of iron rails was 6^.
The saving in cost has been many times this amount.
What the introduction of steel rails did was to give the
initial impulse in this movement. It made itself felt in a
variety of ways.

1. The laying of steel rails and the desire to use them
to something like their full capacity led to many improve-
ments in the road-bed itself. These resulted in great
economy ; but they would hardly have been made under
iron rails, because it would not [have paid to develop the
road-bed far beyond the standard of quality of the track.

2. They found that the steel rails would bear much
heavier loads without danger, and this led to the construc-
tion of heavier cars. The load could be increased in
weight faster than the cars, and thus the " paying ** weight
constituted a larger percentage of the total weight hauled.
Fifteen years ago, the normal freight car weighed 18,000
pounds, and carried a load of 20,000. It was found that
by increasing the weight of the car to 21,000 it could
safely carry a load of 30,000 ; and a further increase
of weight to 22,000 or 24,000 made it possible to carry a
load of 40,000, or even a trifle more.' Of the total weight
of a loaded freight train nearly two thirds might now be
paying weight, instead of only one half.*

3. Along with this economy of load they secured econ-
omy of motive power. This was obtained partly by an
increase in the size of locomotives, which, while it in-

' There is no exact standard of relation between weight and carrying
capacity. The figures in the text are taken somewhat at random. It is im-
possible to tell where the movement will end. Cars are now not infrequently
built to carry 50,000 pounds.

' These figures represent possible results rather than actual ones. An
average car-load of ten tons represents extremely good railroad economy. A
ratio of 50 % paying weight both ways is still more unusual.

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RAILROAD CHARGES AND DISCRIMINATIONS. IO7

creased their cost of building and running, increased their
efficiency still faster ; partly by increased care in making
up trains, so that the existing power was used to the best
advantage. Hundreds of devices, of which we have no
room to speak in detail, were made to contribute to the
desired result.

4. But what contributed more than all else, to the
diminution of cost was that they adapted the business
methods of the roads to the new conditions of traffic.
The improvements in track and cars had increased the
capacity for doing a large business, at the same time that
it enabled them to do it more cheaply. They arranged
their rates to secure this business and to utilize their
capacity to the utmost. One of the most effective de-
vices in this matter was the system of " back-loading.'* To
return a car empty is a great waste of power. In some
cases it is a necessity — cattle cars and oil cars, for instance,
can, as a rule, carry a load but one way. In those cases
the rate must cover the cost of moving the cars full one
way and empty the other, before the rate begins to be
a paying one. For a long time it was so with nearly
all cars employed in the carriage of grain. Gradually
our railroad managers awoke to the fact that for obtain-
ing goods to fill such cars any rate was a paying rate,
when it would cover the difference between hauling them
empty and hauling them full — provided, that is, that such
rates developed additional business which could be ob-
tained on no other terms.

For instance, suppose the cost of loading a car with
wheat at St. Louis and hauling it to Philadelphia was $40,
and the cost of getting it back empty was $15. To give
any profit the rate would have to be over $55 — say $60.
The company sees that by offering a $30 rate it can fill its

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J08 RAILROAD TRANSPORTATION.

car with a return load of coal, and it does so. What is the
result ? In the former instance the expenses were $40 +
$15 =$55; the receipts, $60; the profit, $5. In the
latter the expenses were $40 + $40 = $80; the re-
cepts, $60 + $30 = $90; the profit, $10. Yet the aver-
age rate which secures this profit of $10 is now ($60 -|- $30)
-i- 2 = $45. An increase of 100 per cent, in the profits of
the round trip has been accompanied by a reduction of
25 per cent, in the average rates charged.

This is an extreme case, but it illustrates one of the
means by which railroad charges have been so much
reduced during the past fifteen years. It also explains
how some goods can be profitably carried at rates which
seem utterly unprofitable.

III. — But the fact that the charges are so low does not
make differences in charge bear any less severely upon busi-
ness. A difference of five cents per bushel in the charge
for transporting wheat a thousand miles is a small matter,
taken by itself. It would be weeks before it would make
a difference of one cent to the individual consumer of
bread. But if a railroad makes this reduction for one
miller, and not for another, it will be enough to drive the
latter out of business. Competition is carried on with
such a narrow margin of profit that the railroad has it in
its power to ruin either competitor. The fact that charges
in general are so low only puts men more completely
at the mercy of the railroad authorities, because it is
impossible to find any other means of transportation
equally good and cheap.

A difference in rates not based upon any corresponding
difference in cost, constitutes a case of discrimination.*

' In what follows, we shall confine our attention to discrimination in
freight rates. There is the same discrimination in the passenger business.

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RAILROAD CHARGES AND DISCRIMINATIONS. lOQ

Even when a railroad tariff was originally based on dif-
ferences of cost of service, it does not continue so. It
never remains long unchanged. Every day special circum-
stances arise which were not foreseen, and which seem to
demand a change. The question in every such case is :
what will be the effect of the change ? If rates are re-
duced on certain lines of business, gross earnings will prob-
ably increase on account of increased volume of business
obtained. But will net earnings increase ? That is to say,
will gross earnings increase faster than operating ex-
penses ?

This is the real question ; and its answer involves two
elements. One is, the expense of hauling each additional

but it is not so much felt or so much complained of. First, the business
itself is less important. The receipts from passengers are little over two-
fifths of those from freight. Second, it is a lousiness on which railroads in
general make very little money at best, except in thickly populated dis-
tricts. That being the case, there is more disposition on the part of the
public to allow railroads to run it as they please. , They carry passengers in
order to attract freight. Every now and then they amuse themselves by a
passenger-rate war ; but this does not involve either the same loss to the
railroads or the same disturbance to general business which is felt in a war of
freight rates.

The really serious form of passenger discrimination is the free-pass sys-
tem. It is a serious thing, not so much on account of the money involved,
as on account of the state of public morals which it indicates. When
passes are given as a matter of mere favoritism, it is bad enough. When
they are given as a means of influencing legislation, it is far worse. Yet
this last form of corruption has become so universal that people cease to re-
gard it as corrupt. Public officials and other men of influence are ready to
expect and claim free transportation as a right. To all intents and pur-
poses they use their position to levy blackmail against the railroad com-
panies.

The question should be kept on moral grounds. It is a mistake to sup-
pose that the free-pass system makes any great difference with passenger
rates in general, or that they would be reduced if passes were abolished.
They would probably remain the same as before.

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no RAILROAD TRANSPORTATION.

car-load ; in so far, rates are based upon cost of service/
The other is the increased development of business by
lower rates ; this is quite independent of cost of service.*

Suppose that the expense of loading and hauling each
additional car-load of wheat from A to B is $io. Present
rates are $15, and at that rate the road obtains 1,000 car-
loads a week — gross earnings, $15,000, profit above opera-
ting expenses, $5,000. The question comes up whether
they shall reduce to $13. If by so doing they can double
their traffic and get 2,000 car-loads, it will be good policy ;
they will make gross earnings $26,000 ; expenses $20,000 ;
profit $6,oco. If it only increased the traffic one half it
would be bad policy — giving gross earnings, $19,500;
operating expenses, $15,000 ; profit, $4,500. But, to show
how cost of service comes in, if the operating expenses
had been $12 per car-load, the reduction would be bad
policy in both cases ; while if they were only $8 per car-
load it would be good policy in both cases.

To a certain extent both these elements have acted in
combination to secure the great permanent reduction in
rates.' But in each particular case of reduction, cost of ser-
vice has played but a minor part, and possibility of develop-

* An analysis of the elements which enter into cost of railroad service would
carry us too far out of our way. The chief considerations are speed, bulk,
risk, quantity, and regularity of shipment. The question whether a return
load can be secured is also of great importance. For more detailed analyses
see L. E. Morehouse : '* Cost of Transportation on Railroads," N. Y., 1874.
A. Fink : **Cost of R. R. Transportation " (1874), N. Y., 1882. O. Chan-
ute: *• Elements of Cost of R. R. Freight Traffic," 1874, 1885. Jos. Nim-
mo, Jr. : U. S. Internal Com. Rep., 1876. F. B. Herzog : "The Trans-
portation Question," New York, 1883. Klrkman : " Railway Expenditures,"
I., 291-327.

* See Appendix, for a more exact mathematical statement of these rela^
tions.

* Hepburn Com. Test., p. 47 (joint letter of Vanderbilt and Jewett)
Vining on '* Classification of Freight,"

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RAILROAD CHARGES AND DISCRIMINATIONS. Ill

ing traffic has been the main question considered. Thus
there has gradually grown up a system of rates favor-
ing certain classes of goods, certain localities, or certain
individuals. It was found that by lowering the rates for
cheap goods a large traffic was developed. It was found
that by lowering the rates at competitive points a large
traffic might be secured which would otherwise go by
other routes. It was found^or at any rate, it appeared —
that by lowering rates to certain individuals, a road in-
creased its returns better than by a general lowering of
rates.

This constitutes the system of charging " what the traffic
will bear.*' The ordinary objections to it are obvious at
once. It is generally believed that the less-favored ship-
pers are taxed in order that the railroad may do business
for others at unreasonably low rates * ; that in any other
business the loss of competition would prevent such abuses ;
and that in the absence of any effective competition, laws
should be passed forbidding the railroad to make a great
deal more profit on one part of its business than it does
on another. This is the aim of anti-discrimination bills.

On the other side, it is maintained by railroad men that
this idea of a tax is not warranted ; and that any such at-
tempt to enforce equality, whether between classes, locali-
ties, or individuals, will diminish the profit and efficiency
of the railroads, and not bring the expected advantage to
the shippers, still less to the general public.

The effects of the three forms of discrimination — be-
tween classes of business, localities, or individuals — must
be discussed separately.

'Too often, especially in purely legal discussion, this is assumed without
argument. Compare R. P. Harlow : *' Inter-State Railroads and Their Regu*^
lation by Congress " (N. Y. Bar Association Prize Essay, 1880), p. 8.

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112 RAILROAD TRANSPORTATION.

I. Classification of business. Railroads divide their
freight into four or more classes, the division being mainly
based on the value of the goods. Thus, dry goods are
placed in the first class, and lumber in the fourth; and
the charges on the former are made two or three times
as high as on the latter. There is a difference of cost of
handling, and of risk ; but nothing like as great as the
difference in charge. The railroad does not base its classi-
fication upon cost of service, but upon what the traffic will
bear. A ton of lumber has so little value that, if they
attempted to charge the same rates for it which they
charge for the dry goods, they would get none of it to
carry ; the traffic would not bear the higher rate.

A great deal of freight of small value is carried not
merely at less than the average rates, but at less than the
average cost ; that is, at rates which, if applied to the
whole business of the road, would not pay expenses.
Many people assume that such business is an actual loss to
the road, and that other business is taxed to make up for
it. This is a fallacy. Any rate which will more than
cover the expense of moving the cars and handling the
goods is a paying rate, provided the business can be had on
no other terms^ If it is a question of filling cars that must
otherwise be returned empty, any rate which more than
covers the mere difference in expense between running
them full and running them empty, is a paying rate.' If
a manager should reject such business because it did not
pay its share of the fixed charges (as distinct from train

> Vining : " Classification of Freight," etc.

' See some striking figures in L. E. Morehouse " Concerning the Cost of
Transportation on Railroads," New York, 1874, P» 'S* These figures are
better arranged for our present purpose than are the more comprehensive
statistics collected by Mr. Octave Chanute (1874, 1885), or than those of
Albert Fink in his report on ** Cost of R. R. Transportation," 1874.

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RAILROAD CHARGES AND DISCRIMINATIONS. II3

expenses) he would make a great mistake. He would re-
duce his business, and leave those charges the same. The
fixed charges must mainly be borne by the lines of busi-
ness that can best afford to pay them — ^that is, by the valu-
able goods.*

The earliest freight tariffs involved little or no classifica-
tion. Each step toward our present system has been
accompanied by increased efficiency. It has made the
cheap traffic possible, and has helped the high-class traffic
more than it has hurt it. To do away with this would be

' Take a parallel case from manufacturing industry. A wire manufac-
turer imports the rods which he intends to draw out into wire. He finds
them covered with rust. As the first step in his process he washes off that
iron rust with sulphuric acid. The washings are often allowed to run to
waste. But if a manufacturer will put up the necessary sheds for collecting
them and boiling them down, he can obtain a quantity of crystallized sul-
phate of iron, or copperas. The commercial value of this copperas is very
small. It is probably not worth as much as the acid which it contains. Cer-
tainly no one would think of deliberately dissolving iron in sulphuric acid,
and selling the copperas thus made. But the wire manufacturer has the
material on his hands in the form of washings. It is better for him to sell
for the merest trifle rather than let it run to waste.

Now suppose a legislator says : *' Here is this man making arbitrary dis-
criminations. He has the only wire mill in the region, and so makes a
large profit on his wire, while he allows the consumers of copperas to have
it at prices which hardly pay expenses. In fact, he sells it at a less sum
than the materials cost him. Let us enact a law which shall prevent him
from making more money on one part of his business than another." What
would be the result of such a law ? Would he reduce his price on wire so as
to make no more profit than on his copperas ? Obviously not. Would he
reduce his prices for wire and raise them for copperas ? No. He could not
sell his copperas at the higher prices, or he would have charged them to
b^in with. The only result will be that he will stop making copperas.
His prices for wire will remain the same. If any thing, they will tend to
run higher, because one slight source of advantage is cut off, so that com-
petitors are not so likely to be tempted to come into the business. It would
be nonsense for the man who buys wire to say that he is ** taxed ** to fur-
nish another man with copperas below cost.

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114 RAILROAD TRANSPORTATION.

a long step backward. If our railroads made it a rule to
carry nothing at less than the average cost of doing the
whole business, they would give up nearly all the coal
trade and a great deal of the grain trade. It would give
us dear food and dear fuel, and would injure both the
railroads and the districts which they serve.

2. Local discriminations. Where a railroad is the only
means of conveyance, it can charge what the traffic will
bear, without restraint. But where it comes into com-
petition with a water-route, or with another railroad, its
charges are brought down to the lowest possible figure.
The points where there is no competition are made to pay
the fixed charges, while the rates for competitive business
will little more than pay train and station expenses. It is
better to have business on those terms than to have it go
by the rival route. In a railroad war this competition is
carried beyond the bounds of reason. There was a time
when cattle were carried from Chicago to New York at one
dollar a car-load,* These low rates develop the competi-
tive point rapidly, while the higher rates retard the growth
of the places where there is no such competition. When
the competition is simply between railroads, a pool may
do away with these local differences by raising rates at the
competitive point. Where one place has the benefit of
water competition, and another has not, it is hard to
devise any effective means of getting rid of the differ-
ences.

We are apt to think that because these local discrimina-
tions are an evil, it must be the fault of somebody. In
our anxiety to get rid of the evil, we are apt to overlook
the natural causes which led to it, and which sometimes
must lead to it almost of necessity. That local discrimina-

' Hepburn Com. Test. (Vanderbilt), p. 1659.

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RAILROAD CHARGES AND DISCRIMWA TIONS. 1 1 5

tions are a most serious evil, no one can doubt. That they
are exaggerated, and in many instances flagrantly exagger-
ated, by the short-sighted policy of the railroad managers,
is equally certain/ But there are many instances where
the railroads are not responsible for them,' and where it is
worse than useless to try to prohibit them by law. We
are not arguing in favor of this system, but against the
popular remedy — a statute.

Suppose it is a question whether a road can be built
through a country district, lying between two large cities,
which have the benefit of water communication, while the
intervening district has not. The rate between these
points must be made low, to meet water competition ; so
low, that if it were applied to the whole business of the
road it would make it quite unprofitable. On the other
hand the local business at intermediate points is so small
that this alone cannot support the road, no matter how low
or how high the rates are made. In other words, in order
to live at all, the road must secure two different things —
the high rates for its local traffic, and the large traffic of
the through points which can only be attracted by low
rates. If they are to have the road, they must have dis-
crimination.'

* Hepburn Com. Exhibits, p. 313. Joint letter of Vanderbilt and Jewett,
Testimony, p. 56. Argument of John Norris before Penna. Senate Judi-
ciary Com., Apr. 9, 1885. The general management of a railroad rarely
appreciates local needs at their full importance. The plan of having advisory
boards to represent such interests has frequently been suggested. The plan
has been carried out in some parts of Europe. Mr. H. S. Haines has shown
strong reasons for trying it in America.

* E. P. Alexander : " Reply to Questions of the N. Y. Chamber of Com-
merce." p. 7.

* Or else give a subsidy. The evils of this alternative have been very clearly
seen in American railroad history. Of course this reasoning does not apply
to roads which are earning high profits. But it is almost impossible to pass
A law which shall apply to profitable roads, and exempt unprofitable p|)^

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Il6 RAILROAD TRANSPORTATION.

This point is so important and at the same time so hard
to grasp/ that it is worth while to take a detailed illustra-
tion. On the coast of Delaware, a few years ago, there
was a place which we shall call X, well suited for oyster-
growing, but which sent very few oysters to market, be-
cause the railroad rates were so high as to leave no margin
of profit. The local oyster-growers represented to the
railroad that if the rates were brought down to one dollar
per hundred pounds, the business would become profitable
and the railroad could be sure of regular shipments at that
price. The railroad men looked into the matter. They
found that the price of oysters in the Philadelphia market
was such that the local oystermen could pay %\ per hun-
dred pounds to the railroad and still have a fair profit left.
If the road tried to charge more, it would so cut down the
profit as to leave men no inducement to enter the busi-
ness. That is, those oysters would bear a rate of $i per
hundred, and no more. Further, the railroad men found
that if they could get every day a car-load, or nearly a car
load, at this rate, it would more than cover the expense
of hauling an extra car by quick train back and forth
every day, with the incidental expenses of interest and re-
pairs. So they put the car on, and were disappointed to
find that the local oyster-growers could only furnish
oysters enough to fill the car about half full. The expense
to the road of running it half full was almost as great as
of running it full ; the income was reduced one half.
They could not make up by raising the rates, for these
were as high as the traffic would bear. They could not
increase their business much by lowering rates. The
diflSculty was not with the price charged, but with the

' So able a critic as Dr. v. d. Leyen quite fails to appreciate its force.
^'* Die nordamerikanischen Eisenbahnen," Leipzig, 1885.)

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RAILROAD CHARGES AND DISCRIMINATIONS, 11/

capacity of the local business. It seemed as if this special
service must be abandoned.

One possibility suggested itself. At some distance be-
yond X, the terminus of this railroad, was another oyster-
growing place, Y, which sent its oysters to market by
another route. The supply at Y was very much greater
than at X. The people at Y were paying a dollar a hun-
dred to send their oysters to market. It would hardly
cost twenty-five cents to send them from Y to X. If,
then, the railroad from X to Philadelphia charged but
seventy-five cents a hundred on oysters which came from
Y, it could easily fill its car full. This was what they did.
They then had half a car-load of oysters grown at X, on
which they charged a dollar, and half a car-load from Y on
which they charged seventy-five cents for exactly the same
service.

Of course their was a grand outcry at X. Their trade
was discriminated against in the worst possible way — so
they said, — and they complained to the railroad. But the
railroad men fell back on the logic of facts. The points
were as follows : i . A whole car-load at seventy-five cents
would not pay expenses of handling and moving. 2. At
higher rates than seventy-five cents they could not get a
whole car-load, but only half a car-load ; and half a car-
load at a dollar rate (the highest charge the article would
bear) would not pay expenses. Therefore, 3. On any unU
iovm rate for everybody, the road must lose money, and,
4. They would either be compelled to take the oyster car
away altogether, or else get what they could at a dollar,
and fill up at seventy-five cents. There was no escape
from this reasoning ; and the oystermen of X chose to
pay the higher rate rather than lose the service alto-
gether.

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1 1 8' RAILROAD TRANSPORTATION.

This is a typical case. The business of a railroad is bl
two kinds. Some of its business, like the oysters of X,
must be done over this railroad or not at all. Of such
business it is sure, even at rather high rates. The only
limit is the value of the service ; the excess of the selling
price at market above cost of production at X. But a
railroad may also do business like that of the oysters from
Y, which can be sent to market by other routes. To do
this it must make special concessions and lower rates.

Now many of the railroad expenses are the same,
whether it does both kinds of business or only one. Re-
pairs, salaries, and interest charges are mostly inde-
pendent of the volume of business done. These must be
paid somehow, just as the expense of the oyster car must
be paid somehow. At the higher rate the road cannot
get sufficient volume of business. At the lower rate it
cannot get sufficient profit. It must do as the oyster car
did, get what it can at high rates, and fill up at the lower
ones. If you prohibit this by law you quickly cut away
the margin of profit. And if by so doing you make it im-
possible to run the road, who is most hurt ? Not the
oyster-growers of Y, who had the low rates. They still
have the other route. It is the oyster-growers of X, and
men in like situations, who now cannot do business at all.

There is one difference. The oyster car will be taken
off as soon as it is unprofitable. The bankrupt road may
run on almost indefinitely. But the indirect effect is the
same. Witness the history of Granger legislation.* The
farmers had moved so far west that they were wholly de-
pendent upon the railroads. Where there was but one road
it charged what it pleased. Where there were two, they
fought for the traffic, and brought rates down very low. A

* For details see pp. 130-136.

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RAILROAD CHARGES AND DISCRIMINA TIONS, I IQ

distant competing point paid much less than a near local
one. The Potter law attempted to make the rates per
mile for local points nearly the same as they had been for
competing points. The result was disastrous. The old
roads struggled on as best they might, losing money all
the time. But no new ones were built, and the local
points could not get the service they needed. They suf-
fered severely ; and after two years* trial the law was re-
pealed.

3. Far worse are the discriminations made between
individuals. The system of carrying under special con-
tracts, below schedule rates, is the most serious evil con-
nected with our present methods of railroad management.
Trade adjusts itself to almost any system of classification,
and sometimes even to local discriminations. But where
two individuals, under like circumstances, receive differ-
ent treatment, no such adjustment is possible."

A mere " allowance for quantity," if granted to all with-
out partiality, hardly comes under this head. If a man
receives a reduced rate because he ships in large quanti-
ties, or at stated times, there is good ground for making a
certain difference in his favor. But such allowances are
not always given impartially ; they are frequently kept
secret,' and are often quite unreasonably large in amount.

* The old theory that a nte should be reasonable in itself, and that, if
that is the case, it makes no difference to A what B may be paying, can no
longer be held. The chief thing which A has a right to demand is that he
should not be unfairly handicapped in competition with B. Any such in-
equality is a real grievance. Hepburn Com. Test. (Fink), p. 5 13.

* Hepburn Com. Rep., p. 48. Even where the railroads themselves
would like to do away with them it is not always easy. The diversion of
freight (by pools) from one line to another, so bitterly complained of by
shippers, is resorted to to prevent secret rebates or drawbacks. One of the
worst abuses is the practice of '* underweighing " ; where full rates are
charged, but the shipper is allowed to send more goods than he pays for.

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I20 RAILROAD TRANSPORTATION,

If the object of a special rate is to develop business
which could not otherwise exist, it may possibly be justi-
fiable. Much good is often done in this way. But there
is always a presumption against special rates of this kind.
They establish one shipper; but they handicap others.
The good they do is seen and felt. The evil they do is
unseen, and, for a time, unfelt. This makes the tempta-
tion to grant such rates all the more insidious, and their
actual effects all the more dangerous.

A special contract, for instance, is given to millers at
Niagara. It produces new business at that point. But
if it discriminates unfairly against the millers at Rochester
or Buffalo, the gain of business at one place is made up
by a loss at the other. Not a direct loss, be it observed ;
the mills will not shut down ; but the natural growth of
business will be checked. The railroad manager sees the mill
at Niagara with its new traffic ; he does not see how he may
have prevented the growth of the old traffic at Rochester.

What makes matters worse is that, where the system of
granting special rates becomes deeply rooted, a great
many are given without any principle at all, through the
caprice or favoritism of the railroad companies and their
agents.' The revelations made before the Hepburn Com-
mittee,' as to the practice of railroads in the matter of se-
cret rates were simply appalling. The fact that railroads
had responsibilities to the public seemed to be completely
lost sight of. There was, in many instances, scarcely a pre-
tence of regular charges.' Everybody received favors as

' This is the most indefensible part of the whole system of railroad man-
agement. It is characteristic that Bismarck, who always chooses his fighting-
ground with skill, made this a main base of operations in his contest against
private railroad policy in Prussia. See chap. xiii.

• Hepburn Com. Rep., pp. 49 ff.

' Hepburn Com. Test. (Goodman), pp. 120 ff. It was estimated that

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RAILROAD CHARGES AND DISCRIMINATIONS, 121

a matter of course * ; the only question was how many
such favors he could obtain.

An unfortunate result of the system is that special rates
are granted to the very persons who need them least.
Any concern which does not charge fixed prices — from
the largest railroad down to the pettiest shop, — gives
lower rates to two quite distinct sets of people, and for
two quite distinct reasons. Some people get low rates
because they are too poor to pay the high ones ; others,
because they are too shrewd to pay the high ones. The
very poor msm perhaps gets the low rate, because he
otherwise cannot buy at all ; the rich man gets the low
rate, because he can go somewhere else, and his large cus-
tom is worth making special efforts to secure. The more
justifiable forms of discrimination are those in favor of the
weak. Classification, giving low rates to low-priced arti-
cles of prime necessity, like fuel, lumber, or provisions,
comes under this head. On the other hand, the great
majority of local and personal discriminations are in favor
of the strong." As such, they do great harm to the com-
munity by increasing inequalities of power ; and in the end
they are apt to do harm to the roads themselves. The
Standard Oil Company was fostered by a system of special
rates until it became strong enough to dictate its own terms.'

This was an extreme case ; but there is almost always a

ninety per cent, of the Syracuse business and fifty per cent, of the whole
business of the New York Central Railroad was done at special rates.

'Goodman, Testimony, p. 159. "Question: 'Then the condition of
getting the special rate is making the application ? ' Answer : * Yes, sir."*

' The more plausible arguments in favor of personal discrimination are
made by selecting special instances, where they were given in favor of the
weak. For the distinction between justifiable and unjustifiable rebates, see
E. P. Alexander : ** Reply to Questions of Cham, of Com.," p. 9.

'Hepburn Con. Rep., 40-46. Exhibits, p. 182. Testimony (Rutter),
p. 2,549. See references in previous chapter.

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122 RAILROAD TRANSPORTATION.

certain opposition between the present and future inter-
ests of a railroad. If a company's object simply is to
make as good a dividend as possible for the current year,
that object is best obtained by squeezing the local busi-
ness of which it is sure, and securing competitive business
on almost any terms, however low. But for the perma-
nent interests of the road this is bad policy. The local
business may bear the squeezing for a year or two, but it
will gradually die under the effects. Such a policy de-
stroys a road's best customers, and strengthens the hands
of those who are in a position to dictate their own terms.
A special rate to a favored customer means temporary
gain. To make the low rate general means temporary
loss. Yet, where there is any doubt felt, the latter policy
is almost always the wise one.

In so far as stock-watering makes railroads pursue a
short-sighted policy, it tends to prevent general reductions
of charge. It is only in this indirect way that it has very
much effect upon rates.' Its influence in this matter is
very much exaggerated in the popular belief. A railroad,
as we shall see when we come to consider the attenipts to
base rates on cost of service," does not take its fixed
charges into account in making its rates." It tries to

* The railroads which have high capitalization on the whole do business
at lower rates than the cheaply built ones. During the last twenty years,
while rates have been falling so rapidly, the average capital account of rail-
roads per mile has been increasing. The railroad men often try to make
their capital correspond to their profits ; but they do not try to make their
rates correspond to their capital.

' Chap. ziii.

' This is putting the matter pretty strongly, stronger than many railroad
men would be willing to state it. But if the statements on p. no be correct,
it is unquestionably true. See joint letter of Vanderbilt and Jewett, pp.
70 ff. Testimony (Rutter), p. 414. See, also, testimony of E. D. Worces-
ter before the United States Senate Committee on Transportation Routes to
the Seaboard, pp. 141 ff.

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RAILROAD CHARGES AND DISCRIMINA TIONS. 123

arrange matters so that on each class of business it shall
make as much money as it can above operating expenses.
If it makes a mistake in one place it is so much loss to
the stockholders. It is not a thing which it can try to
make up at some other place ; because, by supposition
it would in any event try to make all it could at
that other place, and to raise rates there would do more
harm than good. To make the most at all points put
together, it tries to make the most at each point.

They thus try to get all they can above operating
expenses.' If their fixed charges are but small, it leaves
them a good profit. If the nominal amount of stock is
small they can pay a good percentage in dividends. If
the fixed charges are large, or the stock watered, the profit
or the percentage will not seem so good. But if they at-
tempt to raise their charges (or refuse to reduce them) on
this account, the general effect would be to lower profits
rather than increase them. The only thing is, that if a
company is trying to pay a dividend which it has not
really earned, it is more likely to pursue a short-sighted
policy in regard to rates."

This temptation to sacrifice the future to the present
is felt far more strongly in the case of a bankrupt road.
A set of officials who are straining every nerve to avoid a
change of management, will tax heavily the traffic which
they have, and tempt new business by discriminations of
every kind. The present to them is every thing; the
future, nothing; and public interests of necessity suffer.

The principle of charging what the traffic will bear,

* Railroad profits are to a large extent of the nature of rent rather than
mterest. They represent excess of market value above operating expenses.

* They are far more apt to manipulate their accounts for this purpose, or
even to make unwise reductions in operating expenses, than to make any
changes with regard to rates.

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124 RAILROAD TRANSPORTATION,

gives the railroads a dangerous power, and one which
is often abused; a power against which competition
furnishes no remedy/ Yet if our analysis of the practice
of railroads with regard to freight charges be correct, and
if our illustrations mean any thing at all, it is unquestion-
ably the principle which enables railroads to render most
efficient service to the community. Still clearer is it that
the high rates are not to be regarded as a tax which could
be removed if the low rates were abandoned. When we
come to examine the practice of European countries,'
where the attempt has been made to base rates upon
cost of service, we shall find these views confirmed ; and
we shall further find that the effort to prevent discrimina-
tion as a system results in levelling up rather than levelling
down.

Wherever there is an industrial monopoly of any kind,
there is a liability to discriminations. They have become
most prominent in the case of railroads, because the
monopoly of railroads has been in some respects most
complete, their activity most extensive, and the investiga-
tion of their doings most searching ; in short, because
the railroad has attained a fuller development than other
forms of industrial monopoly. It is for this reason that
the problem of government control of corporations cen-
tres in the question of government control of railroads.

' The abuses are never so severe as in a railroad war.
• Chap. xiii.

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CHAPTER VII.

RAILROAD LEGISLATION IN THE UNITED STATES.

Early efforts — Railroad taxation — Railroad liability — Regulation of rates —
Pro-rata laws — Origin and history of the Granger movement — Its results
in Illinois ; in other States — Railroad regulation in the South — The
Massachusetts commission — Causes of its success — Results achieved in
Iowa — Regulation of inter-state commerce — Bills now before Congress
— The short-haul principle — Pools — Maximum and minimum rates —
Functions of a national commission.

E. Lavoinne and E. Pontzen : " Les Chemins de Fer en Amerique,"
Paris, 1882, ii., pp. 467-500.

Adams : " Railroads and Railroad Questions," pp. 1 16-148.

" State Railroad Commbsions," The Railroad Gazette, New York, 1883.

The Report of the Special Committee of the U. S. Senate on the Regula-
tion of Inter-State Commerce (1885), with the accompanying testimony, will
furnish matter of great importance on these subjects.

The early railroad legislation in the United States was
devised for the object of securing railroad construction.
The only fear was that railroads would not be built as fast
as they were needed. Obstacles to railroad enterprise were
removed as fast as possible. General railroad laws were
passed " which did away with the necessity of securing any
special act of the Legislature and made it possible for per-
sons with the requisite capital— or even without it — to
build railroads wherever they chose. This negative en-
couragement was not all. Most communities were only
too ready to give positive encouragement in the form of

* In New York 1848, 1850 ; Illinois 1849 ; Ohio 1854 ; Michigan 1855 ;
somewhat later in most of the other States.

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126 RAILROAD TRANSPORTATION.

subsidies. The results of this policy we have seen in a
previous chapter.

During this period very few people were far-sighted
enough to foresee the abuses of railroad power as they
have since developed. Some feared that rates would be
made too high, and strove to provide against it, in a cum-
brous and ineffective way. The great majority of those
legislators who thought about the matter at all, simply
feared that railroad profits would be too high, and sought
to limit the amount which might be divided.* This has
little or no effect in protecting the shipper. If a railroad
is earning more money than it is allowed to divide, it
is much easier to spend the surplus in extra ornament or
extra salaries, than to reduce rates. Such limitation of
dividend may sometimes actually /r^z/^w/ reduction of rates
by taking away from a road the inducement to increase its
volume of business. The road may prefer to do a small
business at high rates, rather than a much larger one at
rates somewhat lower.

The early attempts at railroad taxation were equally ill-
judged. There was a combined effort to tax the road and
equipment by local assessment like any other real estate,
and to tax the securities as personal property in the
hands of the holders. The difficulty about the latter
plan, was the fact that such securities were habitually
concealed, and practically paid no tax at all. The at-
tempt at local assessment of the road was almost equally
unfortunate. No one knew on what basis it was to be as-
sessed. Some assessors valued it as trunk line — u ^., on
the basis of its supposed earning power. Others valued it
as cow pasture — i. e., on the basis of the value of adjoin-

< Compare pp. 102, 103. On the legal aspects of State Regulation of Cor-
porate Profits, see T. M. Cooley, in North Amer. Rew.^ Sept. z883«

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RAILROAD LEGISLATION. 12/

ing land. " The difference in the assessment of the New
York Central and Hudson River Railroad, where for ;
purposes that the road can be used, it is of the same value
to the company, is twenty-four thousand dollars per mile." '
The absurdity of this system, if it can indeed be called a
system, is obvious enough. It has gradually become clear
that the tax must be derived not so much from an assess-
ment of individual pieces of property on the one hand, or
against individual holders of stock on the other, as from an
assessment of the property as a whole. The best method
for doing this is not yet clear ; there is a growing belief
that the tax valuation should be based on^arnings or
earning capacity." ^

Equally crude were the early attempts to enforce rail-
road liability ; whether in the matter of accidents, or for
the performance of their duties as carriers. In the former

' N. Y. State Assessors' Report, 1873.

* R. Foster : " The Taxation of the Elevated Railroads in the City of New
York," 1883.

In the majority of States the assessment is based on a direct valuation of
the property, either made by the State assessors in the first instance, pr made
by local assessors, and then perhaps corrected by a board of equalization.
In Massachusetts and two or three other States, it is based on the market
▼alueof the stock or securities — f. e,^ on net earnings, present or prospec-
tive ; since it is on this that the market value depends. In Michigan and
one or two other States, the tax is based on gross earnings. Real estate not
used for railroad purposes is everywhere assessed locally, just as if it were the
property of an individual ; and an attempt is often made, without much
success, to tax stock as personal property in the hands of the holders. See
the Report of Messrs. Adams, Williams, and Oberly (Committee of the
Convention of State Railroad Commissioners) on Taxation of Railroads and
Raihroad Securities. New York. 1880.

The question, what constitutes the taxable value of a railroad franchise,
bas been pretty constantly evaded. But a clause in the California constitu-
tion has rendered it necessary for the United States courts to meet the
question more squarely ; and a similar result seems likely to be reached in
Mew Jersey in the questions arising under the tax laws of 1884.

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128 RAILROAD TRANSPORTATION.

much real progress has been made ; more by the action of
the railroads themselves than by any scheme of legisla-
tion." In the latter the progress has been but slight. It
is astonishing that a country whose business is so far car-
ried on by bills of lading should have left the question of
responsibility upon bills of lading at such loose ends. It
is still more astonishing that a country whose business is
liable to be interrupted by strikes like those of recent
years should have feared to fix the responsibility for these
interruptions.' Perhaps -it is because the question of rail-

* C. F. Adams, Jr. : ** Notes on Railroad Accidents." New York, 1879.
Compare T. H. Farrer : ** The State in its Relation to Trade," London, 1883,
pp. 141, 142. The travelling public is now pretty well protected against
accidents ; this cannot be said of the railroad employees themselves, who are
subjected to a great deal of avoidable danger, and find it very hard to get
damages in case of accident.

* Public notice was first attracted to these questions on a large scale in the
railroad strikes of 1877 ; and again in the telegraph strike of 1883. The
double question was involved, first, whether the railroads could evade per-
formance of a work of public necessity, and, second, whether the strikers
could be allowed to take advantage of this public necessity to enforce their
demands against the railroads. It is impossible to answer either of these
questions in the affirmative. An effort to give an affirmative answer to the
first question was finally rejected by the courts of New York in connection
with the freight-handlers' strike of 1882. (See Rep. of Sp. Com. of N. Y.
Board of Trade and Transp. on Railway Freight Grievances, 1883.) Yet
if we say that the railroads are under special necessity, and at the same time
forbid the employees to take advantage of it, we are brought into difficulty
at once. Carl Schurz, in an able article in the North American Review^
February, 1884, makes this a ground for uiging that arbitration should be
employed in all these cases as a matter of public necessity and public right.

Each year brings into greater prominence the necessity of a spirit of com-
mon action between the company and its employees. We have not space to
enter upon the various means adopted with this end in view. See Charles
Paine : ** Elements of Railroading," New York, 1885, chap. xiii. M. M.
Kirkman : " Railway Expenditures," Chicago, 1880, chap. viii. It is
part and parcel of the same question which presses itself more and more
forcibly upon all business men as the organization of industry becomes more

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RAILROAD LEGISLATION. 1 29

road regulation has centred around a problem more press-
ing, and in some respects more difficult than any of these
— ^the control of railroad charges, and especially of railroad
discriminations.

The first attempts to control railroad charges had been
as crude as the legislation concerning liability or taxation.
The courts began with a blind reliance on free competi-
tion. T)iis may do very well as a regulator of railroad
profits; as a regulator of rates it is a failure. Yet our
courts have been extremely slow to see thai: it is a failure ;
and where they have seen it, they have gone to another
extreme which is quite as bad. They have in these latter
cases tried to base rates forcibly upon cost of service ; but
this has been done with so little understanding of the rail-
road business as to make their standards either useless or
impracticable.

There have been many efforts to supplement the action
of the courts by legislation. The earliest laws of this
kind attempted to prescribe maximum rates like the old-
fashioned tolls on roads or canals. This was carried
through systematically in England. There have been
occasional instances in America.* But in general even the
stricter sort of American laws have simply prescribed that
charges shall be based upon the distance without actually
prescribing the unit of charge. This is known as 2l pro-rata
law ; rates arranged on this principle are termed equal-
mileage rates.

A pro-rata law, in its crudest form, prescribes that
chaises shall be proportional to the distance. This is
obviously unfair, even under the " cost-of-service " prin-

and more complicated, and personal contact between the capitalist and work-
man ceases.

' The most important instance was probably the provision limiting the
passenger fares of the New York Central to two cents per mile.

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I30 RAILROAD TRANSPORTATION.

ciple, because it does not cost a railroad any thing like
twice as much to carry goods two hundred miles as to
carry them one hundred miles. Once load them in your
cars, and the mere expense of hauling is comparatively
small. Seeing this, attempts have been made so to modify
\}sx^ pro-rata bill as to introduce the principle that the rail-
road shall not make more profit upon one set of shipments
than upon another. This fails, for the same reason that
the attempt of the courts to base rates on cost of service
fails, — there are practical difficulties in the way of its
enforcement. Furthermore, in the attempt to carry out
pro-rata laws, the indirect effect, in crippling the railroads
and frightening away capital, has often been so bad that
the laws have had to be repealed, or remain, for the most
part, unenforced."

Until after the war, the efforts at legislation of this kind
were scattered. All were on a small scale. It was in con-
nection with the Granger movement' (1870-77) that this
problem first assumed its true importance. While the
detailed attempts of the Grangers in large measure failed,
this general result was accomplished, that people realized
the national importance of these questions. The move-
ment thus has an importance quite out of proportion to
the results achieved. .

Nowhere had the policy of railroad subsidies been more

» See pp. 135. 136.

• An adequate history of the Granger movement yet remains to be written.
C. F. Adams*, Jr., ("Railroads," pp. 123-132; North Amer, Rev., April, 1875I
is admirable as far as it goes, but does not profess to go into details. Compare
W. M. Grosvenor, Atlantic Monthly, Nov., 1873 ; P. F. Kupka, " Verkehis-
mittel in den Ver. Staaten,"pp. 290-297 ; E, W. Martin, ** History of the
Grange Movement," Chicago, 1874 ; D. C. Cloud, ** Monopolies and the
People," Davenport, 1873. The two works last cited are valuable chiefly as
reflecting the state of feeling in the communities where the movement was
strongest.

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RAILROAD LEGISLATION. I3I

recklessly carried out than in the Upper Mississippi val-
ley. The spirit of enterprise at the close of the war
found full play here. There was no lack either of national
land-grants or municipal subscriptions. Each community
wanted railroads at any price. Each railroad offered
glowing inducements to settlers. The result was that
railroads and settlers both moved too far west ; and ran
heavily into debt to do it.

In the years 1865-71, five hundred million dollars had
been invested in Western railroads. These roads were
dependent upon the wheat crop for their revenue. The
price of wheat, which for some years had been high, was
at last affected by the extension of production and the
change of conditions. With transportation charges at
their previous figure, the farmers could no longer pay
their debts. With transportation charges reduced, the
railroads could not pay theirs. There was a loss to be
divided, instead of a profit. It was beyond the power of
any law to divide this loss in such a way as to give a
profit to both parties.' It was the result of general indus-
trial conditions.

* The same difficulty exists to-day, and renders it impossible in many in-
stances to make rates which shall be reasonable "in themselves" for either
party. This is a fallacy in the plausible ground taken by the Iowa Commis-
sion, perhaps the ablest body of the kind in the country. They say (Rep.,
1882, p. 556, case of Township Trustees of Red Oak w. C, B., and Q.),
"from the standpoint of the carriers' interest it is needless to make a rate
less than what is fair and reasonable," and '* from the shippers* standpoint
the rate should not be more than fair and reasonable," and, again (Rep.,
1884, p. 13). **the Commissioners still believe the position [above quoted]
to be correct. . . . The Commissioners will labor for reasonable rates,
insisting as against the carrier that it shall not be more than reasonable,
and as against shipper that it shall not be less than reasonable."

Unfortncately these principles fail where they are most needed. If the
parts of the conclusion mean any thing, the whole is often useless. A reason-
able rate "from the standpoint of the carrier" is one which gives a reason-

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132 RAILROAD TRANSPORTATION.

Unfortunately the railroads were managed in such a
way that it seemed as if they were directly responsible for
pretty much all these evils. In the first place, they were
run recklessly, with a most short-sighted view to present
interests only. Outrageous favors were given in the way
of special rates. Where there was but one railroad, it
charged all that it could extort. When the farmer had
once settled so far from any market, he was at the mercy
of the railroad, which furnished his sole means of trans-
portation.

But where there were two competing roads they brought
rates down to a point where they only paid operating ex-
penses, and not any share of the fixed charges. The
resulting discriminations were enormous ; and these dis-
able profit above operating expenses. A reasonable rate '* from the shipper's
standpoint " is one which leaves the shipper a fair margin of profit above
cost of production of the goods. The trouble at the present time is that the
price of wheat is so low that it is impossible to get a reasonable profit for
either party. A rate which is low enough to be reasonable for the shipper
wiU be utterly unreasonable to the railroad, and vice versa. The commis-
sioners wish to apply two independent standards which cannot be made to
meet. The only practical solution of the difficulty is a compromise, based
upon a careful consideration of whtU the traffic will bear, the necessities and
interests of the shippers as well as of the railroads being taken into account.
But any such compromise is far from meeting the demand of the commis-
sioners, that it should be reasonable for each party. On the contrary, from
the standpoint of either party separately, it will be utterly unreasonable.

We have no doubt that the sagacity of the Iowa Commission would pre-
vent them from making serious trouble by undertaking to apply their prin-
ciple to specific cases which it did not fit. Even in the decision quoted,
they recognized the necessity of considering value of service. But it is none
the less a pity that they should enunciate a theory of railroad rates which
breaks down at the critical point when yon attempt to apply it. And the
evil is all the more serious because nine tenths of the people who read the
Iowa report will accept this theory as self-evident truth, and thereby justify
themselves in the use of it from their own standpoint, without reference to
that of any one else.— See Railroad Gazette , 1885, p. 91,

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RAILROAD LEGISLATION. 133

criminations seemed to be the reason why farming did not
pay. The farmer reasoned, first, that if he could get the
rates which competitive points enjoyed, he could sell his
wheat in Chicago and have some profit left ; and, second,
if the roads could afford to carry for the competing points
at these rates, they could afford to do the same for him.'
The additional charge on the part of the road seemed to
him to be just so much taken out of his pocket for the
benefit of the capitalists. What made matters worse was
that these capitalists were living in the Eastern States or
in Europe, and were regarded by the farmer as the ab-
sentee landlord is regarded by the Irish tenantry. What-
ever was paid to the railroad owner seemed like so much
direct drain on the resources of the community. There
was thus a conflict of local interests, which added a politi-
cal strain to the industrial one already existing. But the
raih-oad owners did not perceive the danger ; still less did
they take any measures to avert it. They were managed
with a view to the supposed interests of Eastern capital-
ists without much real regard for the needs of the country
which they served. Too often, in the treatment of the
farmers, the railroad agents added insult to injury. A
state of feeling was developed through the community
which only wanted organization to become all powerful.
It found this organization in the Granges.

That the movement against the railroads should come,
was inevitable. That it took this particular instrument
to make itself felt, was in some sense an accident. When
the first Granges were formed," the purposes of the or-
ganization were, first, to render farmers* homes attractive,

' We can hardly blame him for this, when the editor of the London Econo^
mist, the highest authority of the kind in the world, fifteen years later, falls
into precisely the same fallacy. — Econ., 1885, pp. 66, 316.

• 1867-70.

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134 RAILROAD TRANSPORTATION.

and, second, to make farming more productive. As a
means to this second end, they sought to diminish the
expenses ; and one of the most important elements of
expense was the cost of getting goods to market. It was
thus that they became interested, as an organization, in
questions of transportation and of railroad control. Their
first utterances on this matter were moderate ; it was but
gradually that they became the instrument of popular
agitation.

The first tangible results were reached in Illinois.* The
constitutional convention of 1870 made an important
declaration concerning State control of rates, on the basis
of which a law was passed in 1871, establishing a system
of maxima. This law was pronounced unconstitutional
by Judge Lawrence. The result was that he immediately
afterward failed of re-election, solely on this ground. The
defeat of Judge Lawrence showed the true significance of
the farmers' movement. They were concerned in secur-
ing what they felt to be their rights, and they were
unwilling that any constitutional barriers should be made
to defeat the popular will. They had reached the point
where they regarded many of the forms of law as mere
technicalities. They were dangerously near the point
where revolutions begin.

But they did not pass the point. The law of 1873
avoided the issue raised by Judge Lawrence against that
of 1 87 1. Instead of directly fixing maxima, it provided
that rates must be reasonable, and then further provided
for a commission to fix reasonable rates. Similar laws
were passed by Iowa and Minnesota almost immediately
afterward. The Legislature of Wisconsin went even

' A partial exception should be made in the case of Ohio, where a law
regulating freight charges was passed in 1870, but does not seem to have
been enforced.

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RAILROAD LEGISLATION. 135

farther, fixing, by the so-called Potter Law,* the rates on
different classes of roads at figures which proved quite un-
remunerative. The railroads made vain attempts to con-
test these regulations in the courts. They were defeated
again and again, and finally, in 1877, the Supreme Court
of the United States sustained the constitutionality of the
Granger laws.

But a more powerful force than the authority of the
courts was working against the Granger system of regu-
lation. The laws of trade could not be violated with im-
punity. The effects were most sharply felt in Wisconsin.
The law reducing railroad rates to the basis which com-
petitive points enjoyed, left nothing to pay fixed charges.
In the second year of its operation, no Wisconsin road
paid a dividend ; only four paid interest on their bonds.
Railroad construction had come to a standstill. Even
the facilities on existing roads could not be kept up.
Foreign capital refused to invest in Wisconsin ; the
development of the State was sharply checked ; the very
men who had most favored the law found themselves
heavy losers. These points were plain to every one. They
formed the theme of the Governor's message at the be-
ginning of 1876. The very men who passed the law in
1874, hurriedly repealed it after two years' trial. In other
States the laws either were repealed, as in Iowa, or were
sparingly and cautiously enforced.* By the time the

' The original bill had been much like that of Illinois ; but the railroads,
who were not strong enough to defeat such a bill, hoped that they might be
able to defeat a worse one. They accordingly allowed a series of changes
which made the provisions much more stringent. They might have defeated
these changes had they tried. They did not try, because they thought the
amendments would kill the bill. In this they were deceived. (See N, K.
NaHm, xx., 189.)

' See Reports of Commissioners of Illinois, Missouri, (recently) Kan5as,etc.

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136 RAILROAa TRANSPORTATION.

Supreme Court published the Granger decisions, the fight
had been settled, not by constitutional limitations, but
by industrial ones.

Similar efforts to establish rates by commissions for the
purpose, have been tried in other parts of the country.*
It is in the Southern States that such commissions have
been most successful in exercising their powers. Georgia
has been the centre of this movement, though other
commissions of the same sort have been established in
adjoining States. It is a little hard to say just what has
enabled them to succeed. One thing is, that the rates in
general are so high as to leave them a wide margin above
operating expenses in which to make their changes. An-
other thing is, that the competitive business is so well
pooled that the railroads have their hands free to bring
through and local charges into proportion.'

There is another class of commissions of quite different
character ; commissions with little or no power to act,
and simply established for the sake of securing publicity.
The success of such commissions has been, in some
instances, surprisingly great. This was especially the
case with Massachusetts, under the leadership of Charles
Francis Adams, Jr. The Massachusetts commission was
established in 1869. At first a great many people were

^ The California Commission has had an interesting history, too long to
be detailed. It undertook far more than could possibly be carried out ; and
the Central Pacific was able to defy or evade its authority completely. —
See H. D. Lloyd : " California Cornered," Chicago Tribune^ Oct. 8 and
13. 1883.

' The South Carolina legislation of 1883 was fully as stringent as that of
Georgia ; but some of its strictest provisions were repealed after one year's
trial. The legislation of Alabama has never gone quite so far as that of
Georgia. In Tennessee, a recent adverse decision of the courts has deprived
the enactment of much of its force. In Georg,ia itself a reaction against ex'
cessive regulation seems to be in progress.

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RAILROAD LEGISLATION. 137

disposed to treat it with good-natured ridicule. It had
really no power except the power to report. But its
reports were strong enough to command respect, and even
obedience. The commissioners were by no means in-
fallible. Some of their theories were wrong. They were
in favor of a partial State ownership of railroads, which
couM not have done what they expected of it, and would
probably have proved a great misfortune. But the com-
missioners had something better than correct theories:
they had practical business sagacity. They abandoned
courses which proved wrong ; they followed up with suc-
cessful persistence those which proved right. Gradually,
but surely, they introduced improvements in accounting,
which since 1878 have been further extended by the com-
missioners of other States. In the same way they virtually
compelled the roads to adopt safety appliances, by edu-
cating public opinion to a point where it demanded such
action. And in the same way they exercised a decisive
influence on the policy of the railroads with regard to
rates; leading them to develop their local business, in-
stead of confining attention to the through business.

Two things aided them in this matter: In the first
place, in spite of the prevailing impression to the contrary,
corporations are sensitive to public opinion. Even when
their managers are not, their owners are. For corporate
property is so new a thing that it has not acquired the
immunity from interference which long usage gives, and
its owners know, or are forced to learn, that they must
keep the public in good humor if they would not have
their rights curtailed.

Another fact which helps an intelligent commission is
that the permanent interests of the corporations and the
public are almost always closely allied, however much

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138 RAILROAD TRANSPORTATION.

their tempory interests may seem to differ. If the object
of a railroad manager is simply to pay as large a dividend
as possible for the current year, he can best do it by
squeezing his local traffic, of which he is sure, and secur-
ing through traffic at the expense of other roads by
specially low rates — that is, by a policy of heavy discrim-
ination. But the permanent effect of such a policy is to
destroy the local trade, which gives a road its best and
surest custom, and to build up a trade which can go by
another route whenever it pleases. The permanent ef-
fect of such a policy is thus ruinous to the railroad as well
as the local shipper.*

By securing publicity of management you do much to
prevent the permanent interests of the railroads from
being sacrificed to temporary ones. By protecting the
permanent interests of the railroads you go far toward
securing the permanent interests of the public ; you en-
list the stockholders and the best class of railroad man-
agers on the side of sound policy. This is practically
what the Massachusetts Commission did ; and never was
work more fully justified by its fruits.'

It would be a mistake to suppose that because the sys
tern worked so well in Massachusetts, it must work equal-
ly well elsewhere. We are apt to lay too much stress on
the effects of a mere law or form. It succeeded in Mas-
sachusetts, partly because it was in the hands of able men,
partly because the Massachusetts railroad system was so
old that it had acquired a certain stability. Many abuses

' Germany and Austria have recognized this fact, by establishing the ad-
yisoiy board {Eisenbahnrath), through which representatives of different
localities and industries can bring their influence to bear on railroad manage-
ment.

' W. A. Crafts : Ten Years' Working of the Mass. R. R. Commission.
Railroad GazeiU, N. Y., 18S3.

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RAILROAD LEGISLATION. 139

incident to a period of rapid growth had passed away, or
were in a fair way to regulate themselves. These same
abuses, in newer sections of the country, might baffle all
attempts at regulation. It is impossible to apply one sys-
tem to all conditions. You could no more have applied
European methods to our Western railroads than you
could regulate the growth of an oak by tying tape meas-
ures around its branches.

For this reason the success of the Iowa Commission is
in some respects more remarkable than that of Massachu-
setts. The ground was larger, the country newer, the busi-
ness less stable. Above all there were the difficulties of
absentee ownership, already alluded to. But there were
certain counterbalancing advantages, which the commis-
sioners knew how to make the most of. The commission
was organized in 1878, just after the failure of the Granger
movement. Both parties, the railroads and the public, saw
that they could not act independently of one another. Both
looked to the commissioners to help them to come to an
understanding. As in Georgia, the through business was
pooled in such a way that the roads had their hands com-
paratively free to serve local interests. The commission
under these circumstances acted as the representative of
both parties, and seems to have commanded the con-
fidence of both.'

The really efficient State regulation is now almost en-
tirely under the somewhat discretionary power of commis-
sioners, whether these powers be wide or limited." A

* Of late, its powers have been increased. The commissioners themselves
regard this change as a dangerous experiment. — Rep. Iowa Com., 1884,
p. 42.

* Commissions more or less closely resembling that of Massachusetts exist
in Connecticut, Iowa, Maine, Michigan, Minnesota, New Hampshire, New
York, Ohio, Rhode Island, Vermont, Virginia, and Wisconsin. Somewhat

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HO RAILROAD TRANSPORTATION,

hard and fast law cannot be enforced. Many States have
on their statute-books the so-called short-haul law, which
says that a road shall not' charge more for part of a gfiven
route than for the whole. Yet even where there is a pre-
tence of enforcing this law, a great many violations of it
are quietly overlooked. Each individual State suffers
from want of jurisdiction. State commerce and inter-
State commerce are so mixed that it becomes all but im-
possible to adjust the relations between the two.

This is what gives force to the demand for congressional
regulation of inter-State commerce. Of the right of Con-
gress to take such action there can be no question. Little
use has thus far been made of that right. A purely per-
missive act (1865) authorizes roads to make through con-
nections, etc. ; an act of 1873 provides certain regula-
tions for the treatment of cattle. The general question
of regulating railroad charges was not discussed until the
influence of the Granger movement began to make itself
felt. Since 1873 the matter has constantly been before
Congress. The House has passed bills on the subject two
or three times, and the Senate once ; but they have never
been able to agree. In 1878 the Reagan bill was first in-
troduced to the notice of the House. Since that time it
has been almost constantly under discussion. Various
substitutes have been proposed ; the bill itself has been
modified in some of its essential features. In its most
recent shape it strictly forbids discrimination, local as well
as personal ; prohibits pools ; and provides for the estab-
lishment of a commission with somewhat active powers.
The House Committee in the last session (1884-5) substi-
tuted a much less stringent bill. The House itself reversed

wider powers are enjoyed by the commissioners in Illinois, Kansas, Ken*
tucky, and Missouri — also in the States refened to on p. 136.

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RAILROAD LEGISLATION. I4I

the action of the committee, and passed the Reagan bill.
The Senate substituted a more moderate bill of its own.
U'ltimately no agreement was reached, and nothing was
done.

All the bills agree in trying to stop purely personal dis-
criminations, and in providing for a commission of some
sort. They also agree, for the most part, in trying to
secure publicity of rates. The points at issue are : i.
Whether local as well as personal discriminations shall be
prohibited ; that is, whether the bill shall contain a " short-
haul clause." 2. Whether pools shall be prohibited as
well as discriminations. 3. Whether the commissioners
shall try to determine what constitutes a reasonable rate,
and to fix maximum or minimum limits for railroad rates.
4. Whether the commission shall have administrative
powers, or only advisory ones.

The difficulties under the first head are chiefly of a
practical character. The short-haul principle is right
enough in most cases. As a statement of what is gener-
ally best for the community, or as a general line of railroad
policy, it is undeniably right.' Apart from the temporary
disturbance of business there would be no great objection
to enforcing it by law, provided that law can be made
to reach all the rival routes. If it cannot, you cripple one
set of routes to the advantage of another. Consider what
would be the probable effect if Congress should pass a
short-haul bill, and it should be found possible to enforce
it. Our roads would then be forbidden to make their
through rates lower than their local ones. They could not

' It is also undeniable that our railroad managers have riolated it to an
extent which is unjustifiable even from the point of view of the railroad
owners themselves. Compare the statements of Pres. Devereux of the C, C,
C,& I., before the special committee of the U. S. Senate, 1885, and else*
wheic.

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142 RAILROAD TRANSPORTATION.

reduce their local rates to the standard of their through
rates without destroying their profits. They would have
to raise their through rates. This would have the effect
of sending through shipments of grain via Canada, where
the roads would be subject to no such restriction. The
chief gainers from the passage of any such bill, and almost
the only ones, would be the Englishmen who own the
Grand Trunk Railway of Canada. Similar attempts in
Europe, backed by far greater power and opposed by less
obstacles, have failed from precisely the same difficulties—
either international competition, or the competition of
water routes.

The problem is comparatively new in the United States.
It is old in Europe ; and the result of European experi-
ence has been to give up trying to prohibit pools and dis-
criminations at the same time. It is probably not too
much to say that no law has ever seriously discour-
aged either of these things without at the same time en-
couraging the other. That this is so, is plain matter of
history. It is not hard to explain why it must almost of
necessity be so.

We have seen that railroad expenses are of two kinds,
fixed charges and movement expenses. The latter vary
with the amount of business done, the former do not,
except to a comparatively slight extent. We have further
seen that competition tends to bring rates down to the
basis of movement expenses. Now railroad competition
may exist everywhere, somewhere, or nowhere. If it
exists everywhere, rates are everywhere reduced to the
level of movement expenses, and there is nothing to pay
fixed charges, as with the West Shore to-day. If there is
competition somewhere, the competitive points will have
rates based on movement expenses, and the others will

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RAILROAD LEGISLATION. 143

have to pay the fixed charges. This constitutes discrim-
ination. If we have competition nowhere, this either in-
volves a pool, or amounts to the same thing. We are
thus face to face with the choice between ruin, discrimina-
tion, or pools. The first is out of the question, the second
is the very evil which we are trying to avoid.

Unfortunately the third alternative is not altogether
satisfactory. The history of pools has been a checkered
one. The men who are trying to stop arbitrary abuses of
the railroad power do not like to adopt a means which
shall render that power itself all the stronger. They are
disposed to believe that legal enactments if made stringent
enough can do directly what pools can do indirectly.
There is much reason to doubt whether they can. At
best such enactments bear most heavily on the good roads.
A road whose management is above board is exposed to
the penalty of the law, which a trickily managed road can
evade. We have elsewhere ' shown reason to believe that
the danger of pools was exaggerated. We have never in
the past given them a fair chance. By regarding them as
illegal from the putset, and refusing to give them the
sanction of the law, we have made it almost necessary for
them to pursue a short-sighted policy. Countries which
have not forbidden pools have found it possible to regu-
late them far more easily than they could regulate roads
which were outside of such combinations.

If discrimination, and especially personal discrimination,
is the main evil, it seems best to strike squarely at that
with all our might, and not waste our power by pursuing
other more or less conflicting aims, or by fighting other
less serious abuses.

The effort to establish maximum and minimum rates

» Pages 76. 77.

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144 RAILROAD TRANSPORTATION.

seems unlikely to be successful. It would hardly do to
place the minimum rate very far above the competitive
rate.' On the other hand, it will not do to place the ma»-
mum rate too low to cover its share of the fixed charges
if the road should lose its competitive business. These
limits are so wide apart that they would be almost inopera-
tive. The same indefiniteness attaches to the idea of a
** reasonable rate." On what basis are we to compute it?
It has been recognized under the common law that rates
should be reasonable ; the whole difficulty has lain in de-
fining what constitutes a reasonable rate. Such a clause
might be useful in extending the jurisdiction of the com-
missioners to cases not otherwise provided for ; it is hard to
see how it could furnish any definite guide for their action.
This brings us face to face with the question how far it
is desirable that the commission should have judicial or
administrative powers at all. The general opinion seems
to be that some such powers ought to be given. But
there are important reasons on the other side. First, the
really successful commissions in the United States have
been established with the purpose of securing publicity
rather than with the purpose of executing judgment.
Now, strange as it may seem, the possession of active
general powers is a hindrance in this respect. A railroad
may be ready to give information to an outside party,
which it would not give to a judge who might some time
use that information against it. For the sake of enforcing
the law in a few cases we might readily sacrifice the power
of influencing public opinion rightly in a great many cases.
Again, a commission with judicial powers is abnost cer-
tain to magnify its own office. This danger made itself
strongly felt in England, where the English Commission

' Chiefly because it would prevent the development of low-giade txaffic

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RAILROAD LEGISLATION. 145.

constantly undertakes more than it can accomplish.* The
United States Commission might decide a few cases;
but its authority would be evaded in a hundred times as
many more. The worst evil which could possibly befall
us, would be the attempt to apply a great deal of regula-
tion somewhere^ by an agency which was not strong
enough to enforce such regulation everywhere.

^Chap. ix.

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CHAPTER VIII.

THE ENGLISH RAILROAD SYSTEM.

Contrast between the railroad systems of England and the United States-
Relations of railroads to the investors ; to the shippers ; to one another ;
to the law — Capital and earnings — Rates for passengers and freight-
Organization of railroad service — The Clearing-Hoose.'

For references to books see chapter ix.

The feature of the English railroad system which most
forcibly strikes an American observer, is its stability.
This is the fundamental difference between their railroads
and ours. It shows itself in their construction, their man-
agement, and their legal relations. The mere traveller sees
it in the massive stone bridges, the tunnels and viaducts, the
station accommodations, and a thousand details of less
importance which combine to produce an impression of
solidity and finish, entirely wanting in the majority of
American railroads. The statistician sees it in the figures
showing the cost per mile of road, which* in America is little
over $60,000, and in England is more than $200,000. The
railroad man sees it still more strongly when he compares
the permanent traffic agreements, and smooth workings of
the Railway Clearing-House in England, with the alter-
nation of free fights and hollow truces which has marked
the history of the Joint Executive Committee in America.
The historian feels it most strongly of all, when he sees
the vigor, often obstinate and sometimes blustering, with

' Much of the material in this and the following chapters has appeared ia
the Railroad GautU^ in the course of the years 1884 and 1SS5.

146

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THE EN GUSH RAILROAD SYSTEM. 147

which the English railroads or the English shippers defend
what they deem to be their vested rights, and when he con-
trasts with it the painful helplessness of American Legisla-
tures against the railroads at one point, or of American
railroads against the Legislature at another.

Many writers on both sides of the Atlantic assume that
the differences in railroad management between England
and the United States are in large measure the result of
differences in legislation. This is a mistake. It would be
nearer the truth to say that the differences in legislation
were the result of differences in management. The fact
probably is that the different systems, of management
and legislation both, are an almost inevitable outgrowth
of the different industrial conditions of the two countries ;
and that any scheme of government policy has counted
for little in either case.

The English railroads were mainly built to accommo-
date and extend existing business. As the facilities were
increased, the business grew enormously ; but for the most
part, on lines which already existed before railroads were
thought of. On the other hand, the American railroads
have been mainly built with a view to the development
of new lines of traffic, new establishments, or even new
cities. The Englishman built for the present and future
both ; the American chiefly, and sometimes entirely, for
the future.

This hope of future gains, out of all proportion to pres-
ent traffic, of necessity gave railroad business in America
a more speculative character than in England. It did more
than that. This original difference of purpose laid the
foundation for almost every other prominent difference
between the two systems. It was an all-important factor
in determining the relations of a railroad to its investors,
to its.patrons, to other_railroads, and to the law.

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148 RAILROAD TRANSPORTATION,

I. Railroads and Investors. — The English railroads
were originally built to meet the demands of a commun-
ity which already enjoyed good roads and canals, and
insisted on having good and secure railroad service.
Capital was abundant ; it was spent freely and sometimes
lavishly. Double track was habitually laid, grade crossings
were avoided, and every effort was made to construct the
road under a high standard of engineering art. The re-
sult was that the original line required but slight changes.
There were many improvements made, but there was
comparatively little actual reconstruction.

American railroads, on the other hand, were frequently
built where existing business and existing means of com-
munication amounted to little or nothing ; where capital
was scarce, and where speedy and economical construction
was more desired than solidity or safety. The question
was not what kind of a railroad they were to have, but
whether they were to have any at all. To avoid the ex-
pense of cuttings and embankments the line was adapted as
far as possible to the natural inequalities of the ground.
There were heavy grades and sharp curves. Sleepers were
laid directly upon the ground without ballast. The station
accommodations were insufficient to afford protection from
the weather.

As traffic grew, many of these things had to be changed.
But the changes were not mere improvements, as in
England ; they involved total reconstruction. Their cost
was often out of all proportion to the original investment
The easiest way to provide the money for such changes
was by an issue of bonds. Where the improvements cost
more than the road, the bondholders* investment amounted
to more than the stockholders*. The managers of these
roads were chiefly d^«Uing with borrowed capital, to which

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THE ENGLISH RAILROAD SYSTEM. I49

they were not directly accountable. From this it was but
a step to the system of building roads by the proceeds of
the bonds, where the actual investment on the part of the
stockholders amounted to little or nothing — a practice
which has at times been wellnigh universal in America.

From this abuse of the borrowing power of corporations
and the worst forms of stock-watering, England has been
free. The proportion of bonds or " debentures '* to stock
has been kept down to a low figure. Directors have been
held to their responsibility far better than in America.
They are not allowed to make lucrative contracts with
concerns in which they are themselves interested. It is
true that there have been abuses of trust, and serious
losses of capital. The railroad mania of 1845' ^^ England
was even wilder than that of 1871 or 1882 in America.
But the speculation was at the peril of the shareholders
themselves, and was not done with borrowed capital
obtained from bondholders under false pretences.

2. Railroads and their Patrons. Railroad Service. — The
English roads were organized at the outset with the inten-
tion of performing whatever service might be required of
them as carriers. They did not delegate one part of their
business to a sleeping-car company, and another part to
an express company. The English freight service does a
great deal of business which in America would go by ex-
press. The railroads themselves do the work of collection
and delivery ; and, in the cities at any rate, it is done with
great promptitude. Goods received by the companies at
Liverpool in the afternoon, and destined for London, are
forwarded the same night, and delivered at the door of
the consignee on the morning following. The force em-
ployed by the railroad companies for cartage is enormous ;

* Sec J. Francis : ** History of the English Railway," London, 185 1.

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its organization, for collection as well as delivery, is
thorough ; and the terminal expenses due to this work
form a main item in the freight charges for the higher
classes of goods.

Thus the English system is free from most of the abuses
which have arisen in America in connection with subsidiary
corporations, whether for express service, car service, or
terminal facilities.

On the other hand, when English railroads were first
chartered, the shippers desired and expected to furnish
their own cars. In the low-class freight traffic they have
generally done so. It is characteristic of English con-
servatism that this custom has been retained so long. It
is inconvenient to both railroads and shippers. The ship-
pers complain of damage and detention of cars ; the rail-
roads complain of waste of space and power. Both
parties have good ground for their complaints.' Besides
these more serious evils, the custom gives to English
freight trains a disreputable appearance which contrasts
almost ludicrously with the solid excellence of the line
and buildings. An uninstructed observer might readily
suppose that the companies had spent all their money on
the permanent way, and, having nothing left for equipment,
were tottering on the verge of hopeless bankruptcy. Yet
such is the inisrtia of English business habits, that, except
in the Northeast, the efforts of the railroads have been
powerless to overcome it.

3. Relations of Railroads to one another. — The stability
of English business has made it possible to bring railroad
competition under control. It was said by a member of
Parliament in 1872: " I do not think that there is at this
moment a competitive rate existing in the kingdom." As

' Gttstav Cohn : " Englische Eisenbahnpolitik/' ii., 112-120.

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THE ENGLISH RAILROAD SYSTEM. 151

r^ards direct competition between parallel lines of rail-
road, the statement was not far from the truth.

A railroad in England can calculate its probable busi-
ness in advance. So also if one railway builds a branch
to compete with another for traffic of which the latter has
hitherto had a monopoly, it can guess with some degree
of accuracy what share of the traffic it is likely to control.
The competition, as long as it exists, is less speculative.
And, at any rate, one railroad war will generally settle the
matter. With us a railroad war settles nothing. A truce
is patched up for a time ; but after a few years, or even
months, pass, the conditions of traffic are so changed that
the roads must fight it out over again. But in England
the relative strength is settled once for all. A division of
traffic which is right now is likely to be right ten years
hence. There is no probability that new connections will be
built or new districts developed in such a way as to seriously
alter the relative strength of the competing parties. Still
less likely is it that completely new through-lines will be
built to contend for their share in a new division. There
has been no important case of the kind for more than
thirty years.

A division of traffic for fourteen years or more has not
been infrequent in England. In most part3 of America, it
would be impossible. Our traffic agreements have to pro-
vide for constant revision of percentages; each revision
offers the- opportunity for a new quarrel. Arrangements
of long standing, like the Chicago-Omaha pool, may be
completely unsettled by a new system of connecting lines.
Steady maintenance of schedule rates is equally impossi-
ble. Competition in America is only held in abeyance
for short periods. In England it is really brought under
control.

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152 RAILROAD TRANSPORTATION.

4. Railroads and Legislation. — ^AU these facts have an
important bearing on the position of the railroads before
the law. It may fairly be said that the railroads and
the public are more independent of one another in Eng-
land than in America ; not because there is less conflict,
but because the community feels the results of any such
conflict less in England than with us.

In the first place, the English companies have less to
fear from sudden changes in legislation, or sudden move-
ments of public opinion. They can behave in an exas-
perating manner without endangering any of their well-
recognized rights. Such impudence as was displayed by
the companies in the face of the early decisions of the
Railway Commissioners would be all but impossible in
America. An American road which should thus openly
defy a regularly constituted public authority would raise
a wave of public sentiment against it, which would over-
bear all vested rights and privileges. There is always
danger of a kind of public lynch law. In order to disobey
the law in America, it would be necessary to make a show
of complying with it. But in the majority of cases it may
fairly be said that honestly managed American corpora-
tions have really tried to conform to the requirements of
commissioners, even before the courts have taken the
steps to render such compliance necessary. This has not
been the case in England.*

Even when a law regulating charges is enforced, it
affects railroad earnings in England much less seriously
than in America. If competition is done away with, you
can apply almost any scheme you please with compara-

^ For a striking instance, take the conduct of the Great North of Scotland
in the Aberdeen manure case. Evidence before the Select Committee on
Railways, 1881, qu. 639, 4687. Compare the refusal of the L. & N, W. to
act as carriers of coal, qu. 29931

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THE ENGLISH RAILROAD SYSTEM. 153

tively little harm ; if competition is active, you cannot
with justice or success do what will cripple one competitor
against another. In America we have to deal with rail
and water competition both. In England water competi-
tion still exists, and seriously interferes with some of the
schemes of regulation ; but as far as a railroad competition,
pure and simple, is concerned, the authorities have the
field almost clear, and can arrange matters to suit their
own notions of vested rights. Decisions which would
create a panic in America scarcely call forth a public
protest in England.

But the effect is not all one-sided. These facts cut both
ways. They make the public authorities in America more
powerful, but less independent. If legislation is to have
such a serious effect it must be framed with the utmost care,
or it will react against the men who designed it. The very
weakness of American railroads is thus a source of strength.

Any legislation which seriously affects railroad profits
will check the increase of railroad facilities. Such increase
of facilities is essential to the development of any growing
American community. If such a community passes laws
hostile to the railroad interest, it soon feels the evil effects.
The Potter law in Wisconsin * is an instance in point. The
reduction in charges caused a reduction in profits ; this
stopped the growth of railroads ; the growth of the com-
munity was thereby brought almost to a standstill. The
very interests which were most clamorous for the law in
1874 were most clamorous for its repeal in 1876. The
English public is not affected by restraints of this kind,
because the English railroad system is so fully developed
that its extension is not a matter of vital concern to the
business interests of the nation.

>Sce p. 135.

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RAILROAD TRANSPORTATION.

To sum up : England can afford to make a great many
laws which America cannot, for three reasons : First, the
English railroads have more power to resist the enforce-
ment of laws which injure them. Second, even when the
laws are enforced their profits are not so much affected.
Third, the business interests of England are not dependent
upon increased railroad facilities, nor obliged to encourage
new railroad construction.

The following table * will give some idea of the extent
and financial condition of the English railroad system in
the year 1883 :

Mileage

Capital (and debt)

Per mile

Gross earnings

Per mile

Operating expenses

Per cent, of earnings

Net earnings

Per mile

Per cent, of capital

The United Kingdom possesses about one mile of rail-
road to every six and one half miles of territory ; a little
less than the proportion prevailing in the States of Penn-
sylvania, Ohio, Indiana, or Illinois. But if England alone
be considered, apart from Scotland and Ireland, the pro-
portion is of course much greater — nearly the same as in
Massachusetts.

The cost per mile is remarkably high, not merely in
comparison with the United States, but with other Euro-

*The English figures are from the ** Board of Trade Returns**; the
American figures are based on those of Poor's '* Manual.*'

* This figure is based on the total mileage return ; the others on the return
of miles in operation. Hence the apparent discrepancy.

Great Britain

United

and Ireland.

States.

18.681

110,414

$3,815,000,000

$7,478,000,000

. 204.500

6i,8oo«

345,000,000

824,000,000

18,500

7.500

182,000,000

531,000,000

53

64|

163,000,000

293,000,000

8,750

2,650

4.29

3.9«

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THE ENGLISH RAILROAD SYSTEM. 155

pean countries, the average for the whole of Europe being
only about $115,000 per mile. In the first place, the
original investments of capital were made with a thor-
oughness and lavishness not tempered by any regard to
the immediate wants of trade — the same lavishness which
proved so unfortunate in the case of the Grand Trunk
Railway of Canada, and which English builders have
until recently insisted upon manifesting all over the world.
Secondly, there have been large additions to the capital
account in recent years. The cost per mile of lines open
in 1863 was ;f 32,804, or $160,000. It increased slowly until
1872, when it was ;f 36,000, or $176,000. Then began a
period of rapid increase ; in 1874 it reached £37,000, in 1876
;f 39,000, in 1878 ;£'40,ooo, in 1 88 1 ;f4i,ooo, in 1883 ;f 42,000.
The cost per mile of British railroads at the end of the year
1883 showed an increase of 16 per cent, in eleven years.

To be sure, the United States cost per mile, running up
from $50,000 to $62,000, shows an even greater percentage
of increase — a great deal of it mere water. But it is not
half as great an actual increase for each mile ; and we
almost certainly have more to show for it in the way of
improvement of road and equipment. There was in the
United States a great deal more room for such improve-
ment, and necessity for new capital expenditure on roads
which had been at first badly built and lightly equipped.

It is impossible to avoid a suspicion, which the secrecy
of English railroad accounts prevents us from proving or
disproving, that certain leading English railway companies
have been in past years paying dividends out of capital ;
dividing as large a proportion of the gross earnings as
possible, swelling the construction account unfairly, and
borrowing money for expenses which should have been
paid out of revenue.

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156 RAILROAD TRANSPORTATION,

The worst form of stock-watering, unhappily so com-
mon in America, by which the construction account is
loaded down, not with capital borrowed for investment,
but with purely fictitious capital, representing no actual
investment whatever, is practically unknown in England.
There is no temptation for an honestly managed road to
water its stock in this way, because there is no legal limi-
tation of dividend. The attempt to do it with dishonest
purposes would be not merely unsuccessful, but dangerous
to those who should undertake it.

From the load of bonded debt with which our railroads
are burdened, the English companies are, to a considerable
extent, free. The issue of such obligations has been
practically limited to one third of the paid-up capital.*
It thus happens that while the proportion of net
earnings to capital is essentially the same in the two
countries, the English dividend average is much higher
and steadier.

When it comes to a comparison, not of earnings, but of
rates and services, the matter is much more difficult. It
is almost impossible to compare the amount of work
done, or the cost of doing a given amount of work.
Train-mile figures we have in abundance ; but as long as
we do not know the average weight of freight or number
of passengers carried, we cannot even guess at what these
figures indicate concerning matters of public service. The
English companies do not furnish or even compile ton-
mileage statistics. This is no mere accident of practice ;
it is characteristic of the principle on which English rail-
ways are managed. There is a fundamental difference of

' Instead of the distinction between stock and bonds, the English railroad
capital is divided into ordinary, preference, guaranteed, and debenture
stocks, forming, respectively, 37, 26, 12, and 25 per cent, of the whole. Thf
debentures correspond most nearly to bonds in their character.

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THE ENGLISH RAILROAD SYSTEM. 157

purpose between train-mile and ton-mile statistics. The
train-mile is, in a rough way, the unit of railroad service-
so much work done by the railroad. The ton-mile (or
passenger-mile) is, in the same rough way, the unit of
public service — work done for the public. Now, the whole
theory of the English railroad system starts from the
principle that railroads are to be managed as business
enterprises, not as matters of public service ; hence, their
impatient rejection of the idea that they should compile
a set of statistics arranged from an outside point of view,
with but little inside interest.

We thus actually have no figures which we can compare
in the aggregate. A comparison of charges in detail is
almost equally difficult, owing to differences in the kind
of service rendered in the two countries, and to the multi-
tude of special rates. In general, it may be said that
passenger rates are lower in England, low-class freight
rates higher ; and that for the charges on the more valu-
able freight, no comparison between the two countries is
practicable.

The passenger traffic in its three classes is conducted at
prevailing rates of four, three, and two cents per mile
respectively. Practically, the bulk of the traffic is done at
a two-cent rate. The change in this respect in the last
fifteen years is quite noticeable. Fifteen years ago the
fast trains did not generally carry third-class passengers ;
now they almost always do. At the same time the com-
fort of the third-class carriages has been greatly increased.
The result has been an enormous development of third-
class travel. Comparing the figures of 1880 with those of
1870, we find that the number of third-class passengers
carried had much more than doubled, while the first-class
had increased but slightly, and the second had diminished

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158 RAILROAD TRANSPORTATION^.

considerably. In the year 1880/ out of the immense
total of 541 millions of passengers carried in England alone
(more than double the American figures for the same
year), five sixths were third-class ; so that the third-class
traffic produced more than twice the gross revenue of the
two other classes combined. There is, therefore, but
slight error in regarding two cents per mile as the normal
passenger rate in England, while that in America is nearly
2.35 cents per mile, although the average American pas-
senger journey is three or four times as long as in
England.

Any attempt at comparison of freight charges would be
long, technical, and unsatisfactory. On high-class freight
it is altogether impossible, because the English rates for
such goods include collection and delivery. No one can
tell how much we should allow for cartage, or whether we
should take American freight rates or express rates as our
standard of comparison. An extremely rough estimate,
not making allowance for any of the disadvantages to
which English railroads are subject, would indicate that
their charges per ton-mile on all traffic average are from
fifty to seventy-five per cent, higher than ours.

The means of handling this traffic are in some respects
far better than those in the United States. Especially is
this true as regards organization.

In the first place, the lines of consolidation have become
so definitely settled that we can speak of the English rail-
road system as something in a certain sense complete.
The lines of railroad construction were for the most part
laid down it 1845. '^^^ railroad mania of that year was
never repeated. Ten years more indicated the forms of

^ The same proportion has since held good. The figures for the United
Kingdom for 1883 were : Class I., 36,000,000 : Class II., 66,000,000 ; Qasi
III., 581,000,000.

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THE ENGLISH RAILROAD SYSTEM. IS9

arrangement or consolidation. Another ten years indi^
cated the details. Since that time there has been a period
of comparative quiet. The consolidation has taken place,
not on parallel lines, but on radiating ones. Besides three
northern companies, there are nine systems radiating from
London as a centre. This arrangement increases the com-
mon interests and lessens the conflicting ones.

Secondly, the agreements between rival routes have
been so permanent that they are sometimes no longer felt
as a restraint, so thoroughly has trafiic adapted itself to
their conditions. This is the case with many pooling
arrangements. The early history of English railway pools
is obscure. They first assumed importance some thirty
years ago. The London and Northwestern seems to
have taken the lead in this policy ; its great rival, the
Midland, while maintaining rates, has been less inclined to
divide traffic. English railroads have had great advantages
over ours in enforcing these agreements. The courts have
looked upon them with less disfavor, and statesmen with
much more favor than has been the case in the United
States.' At present they seem to be losing some of their
importance ; not because they are powerless, but, as
already indicated, because traffic has become so stable that
they are less necessary than they were.

Third, in place of our joint executive committee, they
have the far more efficient and highly organized Railway
Clearing-House.' This is not a judicial, nor, in the ordinary
sense of the word, an executive body. It decides no dis-
puted questions ; it makes no rates, It is an incorporated

' One of the most important agreements of this kind is said to have been
arranged by Mr. Gladstone himself.

• The best account of the workings of the English Railway Clearing- House
is to be found in the evidence before the Joint Select Committee of 1872^
Appendix, pp. 839-945.

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l60 RAILROAD TRANSPORTATION.

body ; but this is only to give greater responsibility to its
work. It is simply a highly organized machine for keeping
and settling traffic accounts. It does the work of our fast-
freight lines plus a great deal more.

One part of its work corresponds exactly to that of
our fast-freight lines — namely, the superintendence of
car-mileage accounts. But it can do that work better
than an American line or car clearing-house, because it
has at every junction employees of its own, "number-
men," to check and report the car movement. It is
not, therefore, obliged to depend solely upon reports
furnished by the companies themselves.

Its much more important department of work is to
settle the receipts of different companies from through
freight by accounts and balances, instead of by actual col-
lection in every instance. It was with this purpose that
it was organized in 1842. It grew slowly till 1850, then
rapidly, and has for many years included practically all the
railroads in England.*

It is governed by a committee consisting of one dele-
gate from each railroad. A two-thirds majority is required
for action. Its permanent officers are a secretary and a
treasurer. The accounts are made up, not between each
company and the clearing-house as a whole, but between
each separate group of two or more companies. There
are two reasons for this — first, in order that a special disa-
greement between two companies may not interfere with
the whole system of accounts, and second, in order that
special expenses may be charged where they belong.

For instance, in the matter of classification : there is a

■ The clerical force employed is over 2,000 ; the number of transactions
settled is 7,000,000 annually, with an aggregate value of well on tow.ud
$ioo,ooo.oro. The car-mileage settlements amount to 500,000,000 miles.
F. S. Williams, /* Our Iron Roads/' 3d ed., London, 1884, pp. 313, 314.

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THE ENGLISH RAILROAD SYSTEM. l6l

system generally adopted throughout England known as
the Clearing-House classification. It has been formed by
the Clearing-House, and is but slightly changed from year
to year. Each railroad had originally quite a different
classification of its own, but they have all found it conven-
ient to adopt this general system. But there are certain
districts where a different classification is found more
available, and this difference may affect the billing of the
through business. Unless the companies handling such
consignments object, the Clearing-House does not ; it only
makes an extra charge for the greater trouble in making
up the accounts. So of special rates : any two or more
companies are at liberty to make what rates they please
and divide them as they please, and the Clearing-House
will carry out their wishes. But if one company makes a
through rate and another company is dissatisfied with its
portion of that through rate, and insists upon charging its
own local rate — which it has a right to do when there is
no agreement to the contrary — the Clearing-House takes
no responsibility in the premises. It simply leaves that
account open till the matter is settled.'

* The general method of operation is as follows : Cars carrying any
considerable amount of through freight may all pass from one railway to
another without transshipment. No "paid-ons" are collected by one
company from another. The way-bill, an abstract of which is sent to the
Clearing-House, furnishes a claim which is as good as the money. Only in
case of undercharge the road collects the deficiency.

The gross sum received for a consignment of freight, whether paid by
the sender or the consignee, is debited to the road that collects the money.
The credits for this sum are distributed among the different companies as
follows : First a fixed sum of is. 6d. per ton is set apart for station expen-
ses at each end (except in the lowest class of traffic, which pays half this
amount). Then in the case of all carted goods an arbitrary credit is made at
each end for expenses of collection and delivery — 7s. per ton in London, 2s.
6d. in other places. This is unfair in a great many instances, but it is
claimed that the inequalities balance eaeh other for the whole work of a

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l62 RAILROAD TRANSPORTATION.

The Clearing-House is an institution of unquestionable
benefit to all parties concerned — railroads and shippers
alike. Similar experiments are being tried in various
parts of continental Europe, with a fair measure of suc-
cess. The Southern Railway and Steamship Association
does the same sort of work — though less completely— in
our own country. But all attempts to apply a general
system of the same sort throughout the United States,
have been brought face to face with such difficulties that
they have never been put into actual practice. Neverthe-
less the possibility of finally establishing some such
system is constantly in the minds of many of our most
thoughtful railroad men. It is not impossible that the
right sort of a national railroad commission might do
much toward securing the establishment of a clearing-
house ; and it is certain that the right sort of a clearing-
house, once well established, would do much toward
making the work of a national commission easier and
more effective.

railway company. The sum remaining after these deductions for terminals
is pro-rated among the roads over which the goods have been carried, usually
upon the basis of miles actually traversed. But a company cannot, in
general, claim credit for more than its shortest possible route between the
points where the goods entered and left its lines. And on the other hand
constructive mileage agreements are not uncommon. In fact, any two or
more roads may make any sort of agreements they please about through
traffic, or may even for the time being " agree to disagree," and the Clearing-
House will not interfere ; it will hardly consent to arbitrate when requested
to do so by both parties. Its arbitration committees are for quite another
purpose — ^liot to make rules, but to decide questions of liability under existing
rules. The separate roads must make their own agreements. But all extra
expenses to the Clearing-House in these agreements or disagreements are
cavefuUy charged to the companies in question.

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The early charters— Competition and combination — Acts of 1854 and 1873
— ^Work of the Railway Commissioners — Want of jurisdiction — Lack of
power to enforce decrees — Principles applied in the regulation of rates
— Charter maxima and station terminals — Differential rates — Personal
discriminations forbidden — Questions concerning local discriminations
— ^Efforts of the Railway Commissioners to base rates upon cost of ser-
vice — Results of the investigation of 1881-82.

Report from the Select Committee on Railways : Minutes of Evidence,
and Appendix. 1881 and 1882.^

Gustav Cohn : *' Untersuchungen Qber die Englische Eisenbahnpolitik."
Vol. i : '* Die Entwickelungder Eisenbahngesetzgebung in England." Vol.
ii : *' Zur Beurtheilung der Englischen Eisenbahnpolitik." Vol. iii : " Die
Englische Eisenbahnpolitik der letzten zehn Jahre." Leipzig : 1874, 1875,
1883.*

The history of the general questions of railroad policy
and legislation may be pretty sharply divided into two
periods. Railroad construction formed the subject of dis-
cussion and action in the first period, railroad combination
in the second. The dividing line between the two periods
falls in the years 1845-48.

' Equally good in its day — in some respects even better — was the evidence
collected by the Royal Commission of 1865-1867. The investigations of the
Joint Select Committee of 1872 were less thorough, though their report was
an able document. The work of the Committee of 1853, good in its time,
is too old to have much present interest.

* An admirable book — probably the most careful investigation of railroad
problems, from the standpoint of political science, which has anywhere been
made. Its value must be admitted even by those who difTer from many of
its conclusions.

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l64 RAILROAD TRANSPORTATION.

The first railroad charters were in almost all respects
modelled upon canal charters. Of such models there was
an abundance. England's system of internal navigation
was far beyond that of any other country in completeness.
It is said in a recent parliamentary paper that three fifths
of the railway stations in the United Kingdom are sub-
ject to water competition. It was the strength of this
canal interest that formed the chief obstacle with which
the promoters of the earliest railroads had to contend.
The canals had a monopoly, and they were naturally un-
willing to let it go. But they carried their monopoly
power too far. Had they simply attempted to obstruct
the railways, they might have delayed their constmction
for years. But they squeezed the public too hard at the
same time ; and this extortion created a sentiment against
the canals, which enabled a railway charter of importance
to slip through in the year 1826. This was for the rail-
way between Liverpool and Manchester. There were two
canals connecting these cities ; they had a monopoly of
the available water supply, and therefore feared no further
canal competition. They acted in harmony, charged
what rates they pleased, and made annually cent, per
cent, on the capital invested in them. They could afford
to oppose the railway.* It needed a politician like Huskis-
son to carry the charter through in the face of such ob-
stacles; and he had to spend $350,000 to do it. But the
victory was won, once for all. No sooner was the Liver-
pool and Manchester line opened than the public enthusi-
asm in its behalf was so strong that the canal interests
were unable to make a similar fight against other roads
proposed.

* By a curious reversal of history, the railroads between Liverpool and
Manchester are now engaged in opposing a ship canal which threatens to
interfere with their monopoly

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ENGLISH RAILROAD LEGISLATION. 165

A recent writer has said of the English canals : " Ex-
cessive charges and monopoly rates were as to them un-
known.'* The facts will by no means warrant such a
statement. The evils of which people now complain as
peculiar to railroads had already shown themselves in canal
charges.

It was at first supposed that a railroad would be used
like a canal, individuals furnishing their own cars and
motive power. The clauses in the charter with reference
to facilities and rates were drawn up with this idea.
It was soon seen to be false. Competition between
different carriers on the same railroad was impossible.
Could competition between different railroads be secured
instead ?

It is to the credit of English statesmen that they did
not deceive themselves in this respect. They learned
more in a few years from the workings of a few miles of
railroad than the general public has learned from all the
railroads of the world in half a century. They recognized
that competition could not be relied upon or aimed at
with any hope of success. As early as 1836 Mr. Morrison
of Inverness delivered a remarkable speech/ in which he
made the points, that railroads must naturally be a mon-
opoly ; that competing roads will combine ; that parallel
roads are a waste of capital ; and that fixed maximum
rates are useless. These were good principles ; but they
were not acted upon. There were not men enough in
Parliament who took the matter really to heart. There
were a few violent anti-railroad men, a few energetic rail-
road men, and a great body of men who vaguely felt that
something ought to be done, but shrank from doing any
thing in particular. Speeches like those of Mr. Morrison

* Hansard : 3d series, vol. 33, pp. 977-993.

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l66 RAILROAD TRANSPORTATION.

were unsatisfactory to extremists of both sides, and did
not rouse the moderate men to action.'

In the years 1839-1845, several attempts were made to
secure railroad legislation, Mr. Gladstone taking an active
part in these matters. Beyond a declaration of the right
to revise rates, and even to purchase the railroads for
State management in the remote future, nothing was
actually accomplished. It is needless to say that this has
remained a mere declaration and nothing more. One or
two experiments in the way of railroad commissions made
during these years had worse than no result.

Free railroad competition was meantime being tried and
found wanting. It was not tried on purpose, or because
Parliament believed in the principle. It was because so
many speculators wanted to build railroads, and Parlia-
ment had not the moral courage to refuse them charters.

The early experience of England was different from
that of most other countries in this respect, that people
were readier then than afterward to invest their money in
railways. The question of subsidies never came up, be-
cause people needed to be discouraged rather than encour-
aged. It is not quite true to say that England was
opposed to railroad subsidies on principle, for in Ireland,

' From this point on, the views advanced in this chapter are so different
from those held by Mr. Adams (Railroads, pp. 82-94) that a word of ex-
planation is necessary. The points at issue are in large measure questions
of fact rather than of opinion. At the time when Mr. AHams wrote, the in-
vestigation of 1881-82 had not begun. In the light of the new evidence
then brought forward, he must have changed his opinion on many points.
On the other hand, at the time when he wrote, the results of the work of the
Committee of 1872 were generally overestimated ; and he had not the means
of correcting this overestimate. Finally — to hazard a personal opinion — Mr.
Adams is too active and rational a man to be quite ready to accept some of
the facts of modem English history. He insists on trying to find intelligible
theories to account for actions which were simply the result of unthinking
vis insriia.

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ENGLISH RAILROAD LEGISLATION. 167

where help was needed by the railroads, they were subsi-
dized. In England they did not need any such help, and
did not ask for it.

For the time being the competition was utterly recklessl
Up to the end of 1843 there were 71 separate roads aver-
aging a little less than 30 miles in length. In 1844 they
came down to a 15-mile average; and in the four years
1844-47 there were chartered 637 separate roads with a
total authorized length of about 9,400 miles. No less
than eleven projects were laid before Parliament for lines
of railway through a single valley where only one could
possibly go. These were not attempted under any general
railroad law, but each road required a special act of Par-
liament. What was more, each special act of Parliament
was drawn up by itself, and contained hundreds of pro-
visions, mostly useless trash, as to what the railroad might
do under all conceivable circumstances. The volume of
work thus created threatened to take up the whole time
of Parliament and leave no room for other business.
They tried to delegate the work to a commission ; but then
they insisted on reviewing all the decisions of the commis-
sion and reversing some of them, so that there was no
saving here. Some relief was obtained by the " Clauses Con-
solidation Act " of 1845, which prescribed a form for railway
charters, and rendered it unnecessary to go through all the
350 separate clauses for each of 600 different railways.

But the first real relief to the legislators was obtained
in the crisis of 1847, which cured the English public of all
belief in reckless competition in railroad building. This
crisis was much more distinctly due to railroad speculation
than any other ever has been, not even excepting the
present crisis in the United States, with which it has many
points in common. It was a hard lesson; but it was

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l68 RAILROAD TRANSPORTATION.

thoroughly learned, and did not need to be repeated. It
marked the transition to a new phase of railroad policy;
the transition from a policy of competition to a policy of
combination.

Railroad combinations of importance may be said to
have begun in 1844; at any rate, they then first attracted
much public attention. In 1845 ^^e Board of Trade made
a report to Parliament on the subject of amalgamation,
taking the ground that it was right for continuous but not
for competing lines. In 1846 a special committee of Par-
liament considered this subject, and took what was for
that time advanced ground. Their conclusions were that
companies, by pooling arrangements, can produce all the
evils of amalgamation with none of its advantages ; that
by obtaining concessions from the companies in return for
allowing them to amalgamate, the public interest can best
be served ; and that even the amalgamation of railways
and canals may be allowable, provided the railways engage
to keep the canals in repair. No distinct action was taken
by Parliament on this report.

Another committee on the same subject was appointed
in 1853 ; Cardwell and Gladstone were its leading menv
bers. They made a strong effort to do something, but
found it easier to explain the troubles than to find rem-
edies. They hoped to encourage " running powers " by
which one company should have the right to run its trains
over the lines of other companies. Serious obstacles met
them in the attempt. Nevertheless, if any thing at all
was to be done, it must be done in this way. A railroad
which had a London connection must not be allowed to
freeze out one which had no such connection ; otherwise
the London roads could compel the country roads to
unite with them on their own terms. This was the one

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ENGUSn RAILROAD LEGISLATION, 169

point which the committee seized most clearly ; and the
bill which they brought in and which became a law under
the title of the " Railway and Canal Traffic Act, 1854,"
was conceived with this view — to protect the local roads
in their through business. It provided, first, that every
company should afford proper facilities for forwarding
trafHc ; and, second, that no preferences should be given.

This law had a wide and, on the whole, beneficial effect.
It became the basis for numerous decisions on the subject
of railroad rates ; the details of its application to these we
shall discuss subsequently. But it did not have any
appreciable effect in preventing amalgamation.

From 1853 to 1872, Parliament suggested a great many
things, and accomplished nothing. Least of all did they
check the tendency of the roads to consolidate. Much
was expected of the Royal Commission of 1865-67. But
nothing came of it. They collected a mass of valuable
material, and wrote a tolerably good report ; but when
they came to draw their inferences, they could only say,
in general, that the existing state of things seemed likely
to continue, and that they saw very few means of
helping it.

Another committee was appointed in 1872, and this
time, for a wonder, something was actually accomplished.
In principle they did not depart from the lines laid down
by their predecessors. They brought forward no new
views, and, in one sense, no new laws. They simply pro-
vided means for carrying out the old laws and the old
views. The outcome of their work was an act for carry-
ing into effect the provisions of the act of 1854.

The act of 1854 nad never had a fair chance. The
Committee of 1853 originally intended that questions
under it should be decided by the Board of Trade.

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Through the influence of the railways this had been so
amended in the House that such questions came under
the jurisdiction of the Court of Common Pleas. As many
of these questions were of a technical character, the court
declined to take cognizance of many things which Card-
well had intended should come within the scope of the act.
Here was a real difficulty. The Commission of 1867 had
made a feeble effort to meet it ; the Committee of 1872
grappled with it boldly. They recommended the appoint-
ment of a special Railway Commission, provisionally es-
tablished for five years, to take cognizance of a variety of
cases under the act of 1854, whose decisions were to have
a judicial force. They were further to decide many cases
where the interest of different railways conflicted. It was
thought that before such a commission the public and
the railways could meet on even terms. Their bill was
passed in 1873.

With the act of 1873 the general railroad legislation
may be said to have closed. The movements which the
public had feared for thirty years had now pretty much
expended their force. Amalgamations which were confi-
dently expected in 1872 did not take place, after all.
Joint-purse arrangements became less important instead
of more important, because railroads found that they
could maintain rates without them.

It is not exactly true to say that " in Great Britain the
discussion of the railroad problem may be considered as
over for the time being.** The railroad problem has
ceased to be a bugbear ; but it has become all the more a
question for practical discussion. Vague fears with regard
to the growth of the railway power have given place to
pointed complaints as to its abuse in individual instances.
The period of general legislation has passed. Mr. Adams

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ENGLISH RAILROAD LEGISLATION. I/I

Is right in saying : " As a result of forty years of experi-
ment and agitation Great Britain has on this head come
back very nearly to its point of commencement.'* He is
not quite right in adding : " It has settled down on the
doctrine of laissez faired It might better be said that
it has settled down on the policy of specifie laws for
specific troubles.

The idea of a railway commission was by no means new.
As long ago as 1840 it was felt that some such authority
was necessary. In that year powers were given to the
Board of Trade not unlike those now exercised by the
Massachusetts Railroad Commission. These powers were
further defined in 1842. The Board of Trade was as well
adapted to the work as any body then existing. It had for
years past performed similar functions in connection with
shipping. It failed where the Massachusetts Commission
succeeded, not because of a difference in the law, but be-
cause the English public sentiment with regard to railroads
was not sufficiently active to give such a body the neces-
sary moral support to make up for lack of legal authority.

In 1844 another commission was appointed with more
specific powers. Their special duty was to make prelimi-
nary reports to Parliament on applications for railroad char-
ters. They tried to do their work well, but were beset by
difficulties on all sides. Railroad projectors hated them ;
Parliament itself was jealous of them. After a luckless
existence of about a year, this board was abolished. It
really died of too much work and too little pay. In 1846
Parliament tried the experiment of a railroad commission
of another kind. It offered first-rate salaries, and secured
well-known men ; then it avoided all causes of offence by
not giving them any powers. This lasted five years. Its
fate was the reverse of that of its predecessors ; it died of

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172 RAILROAD TRANSPORTATION,

too much pay and too little work. Thus ended the first
series of experiments in railway commissions.

We have seen what were the events which led to the
passage of the Regulation of Railways Act in 1873. The
commission appointed under that act was to consist of
three members ; one of them a railroad man, one a lawyer.
They received a salary of £1000 each. They were to decide
all questions arising under the act of 1854 and subsequent
acts connected with it. They were further empowered to
arbitrate between railroads in a variety of cases ; to com-
pel companies to make through rates which should conform
to the intention of the act of 1854; to secure publicity of
rates ; to decide what constitutes a proper terminal charge;
and some other less important matters. On questions of
fact their decision was to be final ; on questions of law it
was subject to appeal. The Railway Commissioners them-
selves were to determine what were questions of fact
and what were questions of law. Subsequent acts have
made but slight changes in these powers.

The commission consisted of able men — Sir Frederick
Peel, Mr. Price, formerly of the Midland Railway, and Mr.
Macnamara; the last-named died in 1877, and was suc-
ceeded by Mr. A. E. Miller. They went to work with
energy, and in a spirit which promised to make the experi-
ment a signal success. And it was at first supposed to be
such a success. People judged by the reports of the com-
mission itself. And they were the more prone to believe
these reports, because it was so desirable to find an easy
solution of perplexing questions of railroad policy. Mr.
Adams, writing in 1878, said: "The mere fact that the
tribunal is there, that a machinery does exist for the
prompt and final decision of that class of questions, puts
an end to them. They no longer exist." That repre-

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ENGLISH RAILROAD LEGISLATION. I73

sented the general public opinion on the subject at the
time ; it represents the general impression in America
down to the present time.

In 1878, the very year when Mr. Adams wrote, the
original term of the commission expired. People sup-
posed that it would be made permanent. Instead of that,
the renewals have been for much shorter periods, leaving
the commissioners a precarious tenure, and showing dis-
satisfaction somewhere.

A parliamentary investigation on railroad rates in 188 1-2
showed the grounds of dissatisfaction only too clearly.
The testimony revealed a state of things almost unsus-
pected by the general public, and giving an entirely
different explanation of the fact that the commissioners
had so few cases to deal with. The substance is, that the
poiver of the commission satisfies nobody. It has power
enough to annoy the railroads, and not power enough to
help the public efficiently.

The Railway Commission was a court. Not an execu-
tive body, but to all intents and purposes a court of law.
And in establishing this new court, in addition to those
already existing. Parliament had two ends in view: i.
To have a tribunal which would and could act, when others
would or could not. 2. To avoid the expense, delay, and
vexation incident to litigation under the old system.
Neither end was well fulfilled.

I. The commission could not act, partly from want of
jurisdiction, partly from want of executive power. Its
jurisdiction did not cover by any means the whole ground.
The provisions about terminals, arbitration, working
agreements, etc., amounted to very little. Its real
power was under the act of 1854. It could under this
act require companies to furnish ** proper facilities,** and

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174 RAILROAD TRANSPORTATION.

it could prevent their giving "preferences." But it
could not compel a company to comply with special acts
or special provisions of its charter. This was a serious
difficulty, because the question of proper facilities was
closely connected with charter requirements, and the rail-
road could almost anywhere raise the point of want of
jurisdiction.

Nor could it enforce its decrees. Passive resistahce of
the railroads and jealousy on the part of the old estab-
lished courts, combined to produce this effect. For
instance: under the act of 1854, if the railways refused
to comply with the decisions of the Court of Common
Pleas, they were liable to a fine of $1,000 for every day's
delay. The London, Chatham, & Dover Railway refused
to comply with one of the commission's decisions, and
claimed that they were not liable to any such fine,
although all the powers of the Court of Common Pleas,
under the act of 1854, had been transferred to the Rail-
way Commission by the act of 1873. The Court of
Exchequer actually sustained the railroad ; and it was
not until 1878 that by a decision of the Queen's Bench
the Railway Commission really had the power to do any-
thing if a company chose to disregard its orders.

The injunctions of the commission at best only affect
the future ; for any remedy for the past there must be a
new complaint and trial before a regular court. And so
it often happens that a railroad, after exhausting all its
means of resistance, obeys the decision of the commission
in reference to one particular station, without taking any
notice of it at other stations where the same principle is
involved. Thus, in the case of the manure traffic of
Aberdeen, after long litigation the rate was decided to be
illegal. The railroad then reduced its Aberdeen rates,

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ENGLISH RAILROAD LEGISLATION, \T\

but continued its old schedule of charges at other points
on its route where there were not organized interests
strong enough to make a fight.

On the face of the act of 1873 the decisions of the
commission, as to what were questions of fact or ques*
tions of law, appeared to be final. But by writ of man-
damus from a court of appeal, the decision on this point
could be at once taken out of the hands of the commis-
sion by compelling them "to state a case," which could
then be made the subject of action in the higher court.
So this important power was made of no effect.

2. Complaints before the commission are not quite so
slow or costly as they were before the courts, but they
are bad enough to prevent most men from undertaking
them. Sir Frederick Peel himself admits that the
expense frightens people away from making complaints.
But this is by no means the worst. The testimony before
the Parliamentary Committee of 1881-82 is full of matter
to startle those who argue that because there are few
complaints before the commission there are few men that
have grievances. Men have good reason to think twice
before they enter a complaint. In the Aberdeen manure
case, already referred to, the Aberdeen men, successful at
every point, lost more money than they gained. Every
important case is so persistently appealed that the origi-
nal promptness or cheapness of Railway Commission
practice counts for nothing. But the indirect results
are yet worse. A complainant is a marked man and the
commission cannot protect him against the vengeance of
the railroads. A town fares no better.. It complains of
high terminal charges, and the company retorts by raising
the local tariff for that place 100 per cent.* A coal mine

* Evidence, 1881, qu, 420, 421.

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176 RAILROAD TRANSPORTATION,

complains of freight rates, and the company refuses to
carry for it on any terms ; it has ceased, it says, to be a
common carrier for coal. Even the War Department is
afraid. It has its grievances, but it dares not make them
public for fear of reprisals.' " It is quite clear," says the
Secretary of the Board of Trade, " that it is a very for-
midable thing to fight a railway company."

It IS not easy to see what can be done in the face of
these difficulties, so different from any thing which we see
in most American States. Our commissioners, with fewer
powers, have infinitely more power. The reason is, that
in America to defy such an authority involves untold
dangers, public sentiment being irritable and unrestrained ;
whereas in England it involves no danger at all, puUic
sentiment being long-suffering and conservative.

The lawyers say. Strengthen the legal element in the
commission. Some of the railroad men say so too, be-
cause they think that a commission formed on the model
of the old courts would interfere no more than the old
courts. On the other hand, many men desire the appoint-
ment of a public prosecutor to relieve individuals of the
danger and odium of bringing complaints ; or that cham-
bers of commerce may be allowed to undertake such prose-
cutions. Others go still further, and urge that the powers
of the commission be increased, and that they be allowed
to determine, on general grounds, what constitutes a
reasonable rate. The commission itself would be glad to
do that. But such a thing, however cautiously carried
out, would involve the Granger principle of fixing rates.
It seems quite unlikely that Parliament will make any of
these proposed changes, except to give chambers of com-
merce the right to prefer charges.

' Evidence, 1881, qu. 5965.

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ENGLISH RAILROAD LEGISLATION. 1 77

We have dwelt on the dark side of the picture, because
there is a general impression in this country that the Eng-
lish Railway Commission is a complete success. It must
not be inferred that it is a complete failure. It has in the
first nine years of its existence passed judgment on no
cases. Only 17 of these have been appealed, and in 11 of
them the commissioners have been sustained. The deci-
sions have, as a rule,* been marked by good sense and
impartiality. The direct good to the complainants may
have been very small, but the indirect good to the public
was doubtless great. The commission has made serious
and generally successful efforts to enforce a law in cases
where it would otherwise have been a dead letter. These
particular cases may have given more trouble than they
were worth. But the very existence of such a power con-
stitutes a check upon arbitrary action in general. We
cannot assume, as many do, that the few complaints pre-
ferred before the commission represent any thing like the
amount of well-founded grievances. But we can assume
that the chance for such complaints to be made and
heeded makes the railroad managers more cautious in
giving occasion for them. Although no one is fully satis-
fied with what the commission has done, the great majority
of shippers are obviously of the opinion that it has pre-
vented much evil which would otherwise have gone on
unchecked.

Passing from the means of dealing with the complaint
to the substance of the complaints themselves, we find, in
England as everywhere else, two distinct sets of griev-
ances, involving totally different treatment. Some charges
are complained of as exorbitant in themselves, involving
extortion. Others are complained of as unequal, involv-

* With exceptions to be hereafter noted.

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178 RAILROAD TRANSPORTATION.

ing discrimination. When railroads were first chartered,
people feared the first evil and hardly thought of the
second. They tried to prevent extortion by a very definite
system of maximum rates and fares. For almost every
conceivable sort of goods the charter prescribed how much
toll the railroad might take for use of the way, how much
for furnishing the motive power, and how much for fur-
nishing the cars; also what rates it might charge for all
these services combined.*

It is hardly necessary to say that these provisions were
of little effect. There were several reasons for this.
First, the railroads could carry much cheaper than was at
first expected ; so that most of the maxima were too high
to be of any practical effect. Second, the whole system
of provisions concerning equal mileage rates, terminals,
classification, etc., is quite inapplicable to the new condi-
tions of railroad service which have grown up since the
original charters. Every careful student of the question,
from Morrison, in 1836, down to the committees of 1872
and 1882, has come to the conclusion that fixed maxima
are of next to no use in preventing extortion.

Still, the system of charter maxima is not absolutely
without effect. A few articles have risen greatly in value
since the time of the charters. The charter maxima for
manure were very low; and an Aberdeen Company
brought suit to compel the railroad to carry highly valua-
ble artificial fertilizers under the old manure rates per ton.
The railroad tried to take refuge under the inconsistencies

^ It is worthy of notice that these rates were not based upon cost of
service, but mainly upon the value of the goods, and that certain articles
when destined for export were allowed a much lower maximum rate than the
same article when destined for home consumption. In the charter of the
Stockton & Darlington Railway the maximum for coal in general was 41/.
per ton per mile, but for export coal only \d.

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ENGLISH RAILROAD LEGISLATION, 1 79

of the charter itself, but was not allowed to, and the
Aberdeen company won their case. But instances like
these are infrequent.

A more important case is that of certain short-distance
rates, especially on agricultural produce, where the rail-
roads make heavy terminal charges of questionable legality.
The number of instances of this kind is very large. The
source of the trouble is this : while the train expenses per
ton moved have decreased enormously, the station ex-
penses have, on the whole, risen ; in some cases they have
risen enormously. Not only is the old schedule relatively
unfair, it is, in some instances, absolutely unfair to the
roads, because it does not enable them to meet increased
station expenses on short-distance freight. There is a
sharp conflict now going on, in the courts and in Parlia-
ment, concerning the right of the railroads to indemnify
themselves for these expenses.* The law, as it stands,
seems to favor the shipper ; but it also seems likely that
the railroads can justify their action on equitable business
principles. If so, business principles are likely to prove
mightier than a half-obsolete regulation in a charter.

The plan of trying to keep down rates by a limitation
of dividends has been often proposed, but they have had
too much sense to believe in it. Government revision of
rates has been tried to a slight extent, but the authorities
abstained from putting the new maxima very low, and the
revision really amounted to nothing. The right to revise
rates, quite independently of any charter provisions, has
always been insisted upon by Parliament, but even Prof.
Hunter, the Simon Sterne of English investigations,
admits that ** it would require an extremely strong case
to justify interference." There is no present likelihood
of this right being exercised.

1 Tbe much-yexed question of " station terminals,"

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The subject of exorbitant rates is really a subordinate
one. It is the question of differential rates that most
agitates the public mind ; and it comes up in almost
exactly the same forms which it takes in America. One
set of low rates arises from competition of different
routes, another from special contracts to develop busi-
ness.

As we have already seen, the low differentials for com-
peting points do not arise from the competition of rail-
roads with one another ; at least not to any great extent.
They arise from the competition of water routes. The
long line of sea-coast and the great number of navigable
rivers and canals make this a more important element in
England than anywhere else. The committee of 1872
say that there is a sea competition at about three fifths of
the stations in the United Kingdom. And thus it hap-
pens that while there is every year less and less compe-
tition between railroads, there is every year more and
more complaint of discrimination.

The railroads have tried hard enough to control the
water routes. They have gotten possession of competing
canals, sometimes by methods whose legality was doubtful.
In the case of natural waters they have tried to get con-
trol of the shipping or of the harbor facilities ; and it is
said that one railway, the North-Eastern, running to all
points on the Yorkshire coast and on the Tyne, has so far
succeeded as to control competition by routes on the open
sea. The water is free, but the railroad controls the land-
ing-places.

But there is one large and constantly increasing set of
water routes which the railroad cannot control — the routes
of trade between London and foreign countries. The
western and northern railroads want their share of the

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ENGLISH RAILROAD LEGISLATION. l8l

traffic between America and London; the southern and
eastern roads want their share of the traffic between Con-
tinental Europe and London. The railroads enter this
contest under sonic decided disadvantages. It is the
case of a combined water and rail route competing with
an all-water route which is not essentially longer in dis-
tance. The distance from New York to London via Glas-
gow or Liverpool is about the same as via the Thames.
The distance from Boulogne to London by Folkestone
is not much shorter than from Boulogne to London by
direct steamer. And the rail route involves one extra
handling of the goods. The direct water rates are al-
ready so low that the railroad's share of a combined rate
must be very small indeed ; much smaller than that they
charge on their inland business for the same service.

Thus, the rate from Glasgow to London on the beef of
American cattle slaughtered at the wharf is 45^. per ton,
while for Scotch meat the rate for the same service is 77s.
Foreign hops are charged 17s. 6d. per ton from Boulogne
to London ; English hops are charged 355. per ton from in-
termediate points. Norway lumber is conveyed at about
half the rates charged 'for English lumber of the same
quality. There are hundreds of such examples which
might be given. Of course English producers feel very
indignant at such discriminations ; and they feel worse
because it all seems to be for the benefit of foreigners.
The same sort of feeling was shown here before the Hep-
burn Committee by the New York men, who complained
that the railroads carried cheaper for citizens of other
States; but in England, where it is a case involving other
nations^ matters seem far worse. These competitive
through rates appear to the English public like a premium
on imports against home production.

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l82 PAILROAD TRANSPORTATION.

Special rates to develop business have groMrn up in the
same way as in America; it is hardly necessary to cite in-
stances. The Midland Railway alone has thirty million
such rates. They are rarely based on personal favor-
itism in any open or outrageous way. It is certain
localities or certain lines of business which the railroads
favor, as against other localities or trades.

The attempt at state control of differential rates began
about the time when railroad consolidation became im-
portant. By act of 1845 the companies were allowed to
vary their charges at will within the maxima, but must
charge all persons the same rate for the same service.
This position was reaffirmed in the act of 1854, by which
the railroads were forbidden to grant undue and unrea^
sonable preferences. But this act left it to the Court of
Common Pleas to determine what constitutes an undue
preference. This jurisdiction was transferred to the Rail-
way Commissioners in 1873. The Court of Common
Pleas took up the matter most unwillingly. In every
possible case it tried to shift the responsibility upon other
courts. One of the great difficulties about obtaining re-
dress under the act of 1854 was that the complainant
would be sent from one court to another, and each would
be unwilling to do any thing. In the years 1854-73 there
were only twenty-nine cases under the act, and many of
these were not under the section dealing with discriminat-
ing rates.

From the outset the court enforced the point that there
should be no personal preferences ; that under exactly
similar circumstances all shippers should be treated alike.
The railroads could make as many special rates as they
pleased, but they must be given to everybody under the
same conditions. They took this position so decidedly

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ENGUSH RAJLROAD LEGISLATION, 1 83

that they stopped the practice of personal favoritism
almost entirely. Previous to 1854 there had been many
complaints of this kind; afterward we find very few.
Rebates, such as there were, were given secretly ; when
they were discovered the companies made private settle-
ment for back differences with the parties aggrieved.
The fact that a rate was kept secret was considered pritna-
facie evidence of personal preference.

On other points the decisions conflicted, until the ad-
vent of the Railway Commissioners. Since then they
have all tended in one direction. It was held in the case
of Evershed vs. L. and N. W.,* that the mere existence of
competition in one case and not in another, did not
justify any difference of treatment, Two years later in
the case of Budd vs. L. and N. W. Railway Co.,' the
Court of Exchequer asserted as law what is known in
America as the " short-haul " principle, namely, that the
whole distance between any two points must not be
charged less than a part of it. Two years later, in the
very important case of The Denaby Main Colliery Co. vs.
M., S., and L. Railway,* it was held that the greater dis-
tance must be charged actually more. A year later, in
the case of Richardson and others vs. Midland,* these
principles were applied in comparing rates not on the
same route, but on different branches of the same road.
And, finally, in the case of The Broughton and Plas
Power Coal Co. vs. Great Western,' it was held that the

• Third Rep. Railway Commissioners (1875-6), p. 3. These references
are to the series of parliamentary reports, not to the law reports covering
the same gromid.

■ 36 L. T., N. S., p. 80a. Not a Railway Commissioners' case.

• 7 R. Com. (1880), p. 5.
« 8 R. Com. (1881), p. 6.

• 10 R. Com. (1883), p. I

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I84 RAILROAD TRANSPORTATION.

differences in charge must be greater than the difference
in cost ; that is» that the railroad must make more profit
on through shipments than on local ones.'

These cases, and others involving the same principles,
show: I. That the commissioners are acting upon the
theory that rates should be based upon cost of service.'
2. That they propose to apply it to an extent which has
proved impracticable wherever tried, whether by Bismarck
or by the Grangers. 3. That they intend to use it as a
protection to vested rights, against the levelling tendencies
of the railroad system. American courts generally con-
tent themselves with trying to use the cost-of-service
principle to prevent the creation of inequalities. The
English courts use the same principle to prevent their
abolition. This is the explicit intent of the Denaby
Main Colliery decision.

The Commissioners* lack of power has prevented them
from doing the harm that any general application of these
principles would produce. It has also prevented the
proof that the principles were impracticable, which would
so soon make itself felt if they were rigidly applied. But
they have caused things to be looked at in a wrong light
The railroads, finding it of no avail to plead value of ser-
vice or necessities of competition as the reason for in-
equality, attempt to prove a difference in the cost of
service, where it does not really exist. And so we have
the spectacle of shippers, courts, and railroads attempting
to stretch a wrong principle to cover cases to which it
does not apply.

But there were a great many cases where the standard

' Not more in proportion, but more on each consignment of a given
quantity.

' llie Caledonian Railway was forbidden to charge more on cannel coal
than on less valuable kinds. — 2 R. Com.* p« i.

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ENGLISH RAJLROAr> LEGISLATION. 18$

was not elastic enough to suit the facts, and the facts too
stubborn to be squeezed down to the standard ; and this
led to the appointment of the parliamentary committee
of 1881-82 to consider the subject of discriminating rates.
The twenty-seven members of the committee represented
a great variety of conflicting interests ; four of them were
railroad men. After hearing a vast mass of testimony,
this committee came to a different conclusion from the
commission, and a more sensible one. When the commit-
tee came to make up their report two drafts were pre-
sented, one decidedly favorable to the railroads, the other
criticising them moderately. The first was rejected by a
vote of 12 to 10; but the second was so amended as to
bring in many of the ideas of the first; and the final
report as it stands defends differential rates, and does not
regard cost of service as the sole standard. The report is
negatively rather than positively good ; but as compared
with recent English decisions, it is a great advance. No
action was taken by Parliament upon it ; in fact, as far as
concerns our present subject, it calls for no action. It
simply declared that there were no general grounds for
interference.

The present state of things may be summed up as fol-
lows:

1. The roads may make what special rates they please ;
but if they make a rate for one man they must extend
the same privilege to all others in like circumstances. If
they have been secretly paying rebates to one shipper,
they may be compelled to refund to any other shipper
similarly placed, the same rebates on all his shipments
since the special contract with the one shipper began.

2. It is held by the Railway Commissioners that two
shippers are similarly placed and must be similarly treated

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l86 RAILROAD TRANSPORTATION.

when the cost to the railroad of handling the goods for
one IS the same as for the other ; and, conversely, unless
some special reason can be shown, the railroad has no right
to put a less favorably situated shipper on an equality with
a more favorably situated one.

3. But the last parliamentary committee has refused to
indorse these principles, and has said that '^ a preference is
not unjust so long as it is the natural result of fair compe-
titioa"

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CHAPTER X.

RAILROAD POLICY IN FRANCE.

Traditions of government activity— General scheme adopted in 184s —
Gradual consolidation under six companies — Legislation of 1859 — Gov-
ernment guarantees of interest — Local roads — Attempt to combine them
for speculative purposes — Movement in favor of state ownership— De-
cree of 1879— Financial difficulties— Failure of the project— Contracte
with the companies, 1884— Mileage and dividends— Effects of the
French system upon construction, traffic, and rates. '

The traditions of Continental Europe all pointed toward
government monopoly of the means of transportation.

There 13 one respect in which England and America are
like one another, but sharply different from France, Ger-
many, or other European countries. It is in the way in which
people in general are disposed to regard government inter-
ference. The English and American maxim is that what-
ever can be done without government, should be thus done.
The continental principle is that whatever can be done by
government, should be. It has become a commonplace say-
ing that our Anglo-American idea of liberty is not developed
in Continental Europe. When a Frenchman speaks of lib-

' French railroad literature is full and valuable, but unfortunately not
easy of access to American readers. The great authority is A. Picard:
*' Les Chemins de Fer Fran9ais," 5 vols., Paris, 1884. This is nothing less
than a well-digested collection of all important public acts and utterances of
French railroad policy — as nearly as possible in their original form. The
works of Dttverdy and Jacqmin are also of great value.

Much use has been made of the Annales des Fonts et Chaussies, The
Revue Generale des CAemins de Fer is more purely technical in its character.

187

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1 88 RAILROAD TRANSPORTATION.

erty, it is not so much freedom from interference with his
own movements that he seeks, as the right and power to
interfere with other people's movements. What he really
wants is political power. A party may call itself liberal
or republican ; but when it gets into power it governs
about as strictly as its predecessors. Sometimes there is
a monarchy, sometimes a democracy ; but there is always
a bureaucracy ! — a government by office-holders.

This habit of governing and being governed has resulted
in much better state work, and much worse individual work.
On the continent of Europe private enterprise at best was
timid. In many countries it seemed hardly possible to have
railroads at all unless the state took the initiative. The
state controlled the roads and canals. It had managed
the post-office for centuries. In due time, it took up the
telegraph as a branch of the post-office. People had looked
to it to take up the railroad system as a branch of the road
and canal system, in exactly the same way that it after-
ward took the telegraph.

This was not done ; there were financial reasons in the
way. To build a system of railroads involved a somewhat
speculative expenditure of capital, on a scale sufficient to
frighten conservative statesmen. Small states with good
credit might undertake something of the kind. Large
states, like France, Austria, or Prussia, did not venture to
do so. They adopted a policy of subsidies to encourage
private companies, for without such subsidies much neces-
sary work could not be done at all. In return for
these subsidies, they reserved more or less important
rights of state control.

Thus the early history of European legislation was deter-
mined not so much by the character or wishes of the dif-
ferent governments, as by their financial condition. The

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RAILROAD POLICY IN FRANCE, 1 89

small states adopted a policy of at least partial govern-
ment ownership, best typified in Belgium. The large
states adopted a policy of support and control without
actual ownership. This was most consistently carried out
in France. Austria (and afterward Italy) for a long time
stood somewhat noar to France in their general policy ;
Prussia inclined more toward the Belgian system. Since
1870 there has been an almost general movement away
from the policy of sta^te support and control, and toward
that of actual ownership. The difficulties of control have
been found greater, the financial risks of ownership less.
Above all, the governments have been roused to the idea
of the supreme importance of a railroad policy as an ele-
ment in the industrial and even in the political life of
nations, and have felt that nothing short of complete
ownership and direct management of railroads would give
them the power to which they aspired.

So much for the general influences which have acted
everywhere. It is hardly necessary to say that each sep-
arate nation had a railroad history of its own, in which
the traits of its national character were reflected.

This was strikingly the case in France. A Frenchman
cares very much more for systematic arrangement than an
Englishman, and very much less for original and untram-
melled business activity. The system of roads and water-
ways existing in 1830 suited the French nation exactly.
They were so arranged that they looked well on the map ;
so classified that each bore its exact proportion of import-
ance, whether national, departmental, or local. They were
regulated from Paris with ease, and yet with military pre-
cision. Never was there so good a corps of engineers for
carrying out government programmes as that which was
trained at the £cole des Fonts et Chauss6es in Paris.

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igO RAILROAD TRANSPORTATION.

They were men of first-rate training and high general
standard of talent. Few of them were men of genius or
originality in the highest sense of the word. Yet this
very absence of rule-breaking genius probably rendered
them all more efficient as a body of trained public ser-
vants.*

France was slower than some of her neighbors in taking
up railroad construction, probably because her roads were
so good and her engineers so well drilled. Nor was the
nation at all inclined to let a railroad system grow up
piecemeal. They wanted a comprehensive scheme or
none at all. The very first thing done (except to charter
a few horse-railroads in 1826-32) was to appropriate money
to pay the government engineers for laying out a general
system of railroad lines. When this survey was completed,
they next took up the question of principles of ownership
and management. While other countries were acting and
experimenting, France was reasoning. There was a long
series of debates in the years 1 837-1 840. Nothing was
settled until 1842. The author of the plan finally adopted
was Thiers. The state was to contribute about $50,000
per mile, and own the road-bed. Private enterprise was
to be called upon for whatever was necessary (about
$40,000 per mile) for track, equipment, buildings, etc.
After some forty years the whole was to revert to the
state.

If the French had delayed a long time, they had at any
rate succeeded in maturing plans, both of engineering and
of legislation, which they have since carried out pretty
consistently. Both in the arrangement of the lines and
in their relation to the government, they have maintained,
with variations of detail, the form contemplated from the

■ M. M. Y. Weber . " Nationalitit und Eisenbahnpolitik," pp. 30, 31.

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RAILROAD POLICY IN FRANCE, I9I

first.' This is more than can be said of any other
country.

Under this plan thirty-three different companies were
chartered with about twenty-five hundred miles of author-
ized line. Railroad building went on rapidly until the
revolution of 1848 ; it was then checked so suddenly that
the next three years show an actual decrease in the mile-
age in operation. With the accession of Napoleon III. in
18*51, there came a new era of railroad activity, which
lasted until the crisis of 1857. This activity was stimu-
lated by a change in the charters, extending their duration
in general to ninety-nine years from date of alteration.
Had the original plan been followed out, the lines would
now be reverting to the government. As it is, they will
remain in private hands till the middle of the twentieth
century.

The crisis of 1857 produced so complete a stoppage of
railroad building that new legislation was resorted to.
This stoppage and this supplementary legislation were an
almost necessary consequence of the French system. The
lines had been laid out with the idea of avoiding all waste
of capital. They were traced by government engineers ;
each part stood in its proper relation to the whole.
Parallel roads were forbidden as a matter of course. At
first this worked extremely well. It forced the numerous
independent companies to work in harmony with one
another. But it rendered the process of consolidation all
the easier. Soon after the accession of Napoleon there
were but eleven independent companies. In a few years
more the eleven were reduced to six— five radiating from

'Leon Ancoc: ''Conferences snr T Administration et le Droit Adminis-
tratif/' vol. iii. A r^um^ of the part bearing on railroad policy has been
published in the Journal of ike Statistical Society (London), vol. xlv., pp.
496-504.

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192 RAILROAD TRANSPORTATION.

Paris in different directions, the sixth in the extreme
south. Each had a monopoly in its own district. For
the through traffic between the great centres there was
very little competition, either actual or possible. This
was a state of things which has not prevailed to the same
extent in any other actively industrial country. Its effects
were distinctly bad. It had the effect of making the roads
neglect the development of local business by branch lines.
The through business brought a greater rate of profit
than the local or branch-line business was likely to. Not
being afraid of interference in the former, they felt no
necessity for securing the latter. This is why the stop-
page of railroad construction in 1857 was so complete.

New railroad construction was necessary for the devel-
opment of the country. In order to secure it the govern-
ment had recourse to a system of guarantees of interest.
The general scheme for this purpose was devised by De
Francqueville in 1859. The roads under profitable opera-
tion were set apart under the title of " old net-work "
(ancien r^seau). The lines which were unprofitable, and
the far greater number of lines not yet constructed, were
together classed as the " new net-work." Each of the six
companies undertook the construction of a large number
of new lines in its own district. Money for their con-
struction was raised by bonds on which the government
guaranteed four per cent, interest plus a contribution to
a sinking fund which should be sufficient to pay off the
bonds at maturity. These interest charges did not con-
stitute a first lien on the income of the companies. They
were not called upon to pay any of this interest unless
the surplus on the old net-work was sufficient to pay such
dividends as they had been paying in the past, plus certain
other fixed charges. The amount of this " reserved rev-

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RAILROAD POLICY IN FRANCE. I93

enue " was fixed by special agreement with each company.
Any thing in excess of this went to pay interest on the
new bonds or to repay the government for such interest
previously advanced. When the companies were no
longer indebted to the government, or forced to have
recourse to its guarantees, they were then allowed to
increase their dividends beyond the percentage fixed by
agreement.

The provision that every thing should revert to the
state after ninety-nine years, or thereabouts, remained
unchanged. There was an additional provision giving the
state, after fifteen years, the right to buy up any or all of
the roads, on terms favorable to the stockholders.

The legislation of 1859, ^^ ^^s main provisions, remained
unaltered until 1884. The changes of 1863 and of 1868-9
were of minor importance. The system as a whole was
more advantageous to the railroads themselves than to
the government or the country. The guarantees of in-
terest made the securities extremely valuable, and lessened
the necessity for enterprising management. Some roads
payed off their obligations to the government, and got the
full profit from lines which they had themselves run no
risk in constructing. Others found it hopeless to try to
meet these obligations at all ; they then pocketed their
guaranteed dividends, and let the government pay interest
without any prospect of repayment. The companies were
literally in the position " heads I win, tails you lose."

No scheme arranged at Paris could meet all local de-
mands ; and it was to satisfy such demands that a measure
foreign to the general tenor of French legislation was put
in operation in 1865. It provided for the construction of
local roads, not belonging to the great companies. The
local authorities were given the right to subsidize such

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194 RAILROAD TRANSPORTATION.

roads largely. It was provided that they were to be inex-
pensively built, and that they should be so arranged as to
form mere branches ; not to be combined into through
routes which might interfere with the monopoly of the six
companies.

Unfortunately they did one thing which rendered it
doubtful whether the last provision would be carried out.
They had these local roads built with standard gauge.
The result was what might have been expected. After
the downfall of the empire, when the central authority
was weaker, the prohibition to combine was practically
abandoned. The scattered local roads now became possi-
ble competitors of the main systems, in case connecting
links should ever be built. The cheapness of these local
roads made the danger all the greater. In 1875 a Belgian
named Phillippart tried the experiment. He was an able
operator, and had succeeded in a similar attempt in his
own country a few years before ; but in France the powers
opposed to him were too strong, and in 1876 he was
completely beaten. He had succeeded in distorting the
local roads from their true purpose, and extending them
into combined insolvency, without making them suffi-
ciently effective competitors against the old roads for him
to be able to levy the blackmail which he had hoped.
His failure left his railroads in a condition worse, in some
respects, than is that of the West Shore to-day.

These railroads lay in two main groups — one in the
north, the other in the southwest. The former was almost
immediately absorbed by the Northern Railroad, finan-
cially the most powerful of the French companies. The
southern group, after a year or so of the most helpless
misery, seemed likely to pass in the same way into the
hands of the Orleans Railroad, when an agitation in favor

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RAILROAD POLICY IN FRANCE. IpS

of direct state management made itself strongly felt, and
the proposition to allow the consolidation was overwhelm*
ingly defeated in the French Chamber of Deputies.

The movement in 1877 in favor of state ownership was
probably due to patriotism more than to any other one
cause. Some desired the government to have more civil
power, others desired it to have more military power.
They had seen the advantage accruing to Germany in the
war of 1870 from its control over railroad administration.
Bismarck was now engaged in still further extending gov-
ernment ownership in Prussia. Why should not France
do the same, now that such an opportunity offered?
These reasons, vigorously urged, met with all but unani-
mous approval. The railroads of the southwest were
taken under direct state management.

This was but the beginning. France had fallen behind
her neighbors in railroad building. She had but thirteen
thousand miles of railroad, while Germany, with not many
million more inhabitants, had eighteen thousand miles.
Ten thousand miles more were needed. The companies
were unwilling to build them. With perhaps two excep-
tions, they had reached a condition like that which existed
in 1859. If ^^^ companies would not build them, said
the ministers, then the state must do so. De Freycinet,
the Premier, was a sanguine man, who never did things by
halves. He boldly proclaimed the need of a loan of six
hundred million dollars ; and then, without waiting to
know whether he could get it, he proceeded to lay down
the detailed plan of the work. By a decree of July, 1879,
the lines were determined upon, on the very grandest
scale, without detailed estimates of cost.

It was easy to draw the plans; it was not so easy
to secure the money. Even the French Chambers felt

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T96 RAILROAD TRANSPORTATION,

serious doubts concerning the project of public expend!
ture on a scale like this. A little was built each year,
with special credits voted for the purpose ; but the lines
were disconnected. The question which should be built
first, was determined by the political claims of rival local-
ities, rather than on any broad business principles. Scat-
tered as they were throughout the country, there was
nothing to do except to lease them for short terms to one
or another of the six great companies, according to the
district in which they happened to be situated. Nor was
the state much more successful in the management of its
roads in the southwest, which it had taken up in their
distress. Instead of becoming a power in the railroad
world by the management of these lines, it was brought
into a position of weakness. They were not well situ-
ated, and did not reach Paris at all. Attempts were made
to secure a Paris connection for the state by the purchase
of the Orleans system ; but they were futile.

Meantime financial aflairs were taking a turn which was
likely to put a stop to all magnificent schemes of railroad
construction or purchase. The power of the French Gov-
ernment to raise money, whether by taxing or by borrow-
ing, for a longtime seemed unlimited, but the limit began
to make itself felt as early as 1881. The mighty maker
of projects and spender of money— De Freycinet — had
been forced to resign in the autumn of 1880. After
his departure, and under the more strained financial
conditions, France no longer had the power to carry out
his projects. At the same time it could not definitely
resolve to abandon them. The counter-propositions of
L6on Say, an able financier, were rejected. Committee
after committee was appointed to consider these ques-
tions; but with no result whatever until the death of
Gambetta, at the beginning of 1883.

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RAILROAD POLICY IN FRANCE. I97

In some respects Gambetta was to France what Bis-
marck was to Prussia. He had not the same political
power, but he had the same kind of moral influence. This
was ntore evident after his death than it had been during
his lifetime. Though not the nominal leader, he was the
real mainstay of the movement in favor of state railroads ;
when he died the movement lost its strength. The very
men, like Raynal, who under Gambetta's influence had
been strong supporters of state management, now found
themselves more ready to yield to financial necessity and
leave the railroad system to be developed by private com-
panies.' A series of agreements to this effect was negoti-
ated in 1883. They were resolutely but unsuccessfully
opposed by the more faithful adherents of state manage-
ment. By the beginning of 1884, the whole scheme was
definitely settled ; apparently fixing the railroad policy of
France for some time to come.

The leading bases of settlement are as follows :
I. The state confines its system to a rather small district
in the southwest. The isolated lines which it owns in
other parts of the country it gives up to the companies in
whose district they are situated, making their monopoly all
the more complete. By way of compensation it receives
a few outlying lines of other companies which might com-
pete with the state in its own southwestern district. It
abandons all idea of a Parisian line of its own, merely
stipulating for a permanent connection over the lines of
the Western Railroad. In giving up the idea of reaching
Paris, it gives up all prospect of becoming a controlling
power in the French railroad world.

' On tli6 most recent phases of French railroad history there is an excel-
lent attick by Dr. v. d. Leyen, in the JahtbuchfUf Gtsettgebung (Leipzig),
N. F., Tiii., 4.

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198 RAILROAD TRANSPORTATION.

2. The additional lines needed are to be constructed by
the companies in whose districts they belong. The state
will pay for them all ; not at once (except, of course, in its
own district), but by annual instalments of about thirteen
million dollars each, for seventy-four years ; at the end of
which time the companies' charters expire, as arranged in
1859, 2tnd the whole reverts to the state. What the com-
panies actually do in this matter is to advance the capital,
make what they can out of the roads, and receive their pay
in instalments ; so calculated that at the time when the
charters expire they will have recovered their original ad-
vances with interest.

The length of the line now in operation and of new line
to be constructed under the conventions of 1883, is as
follows :

Miles now

To be

in operation.

constructed.

Total

Mediterranean

. 4»5<X)

1,500

6,000

Orl<fans .

. 3,100

1,500

4,600

Western .

. 2,500

1,000

3,500

Eastern .

. 2,200

Boo

3,000

Southern

. 1,500

1,100

2,600

Northern

2,000

300

3,300

State

* 1,300

700

2,000

Total . . . 17,100 6,900 34,000

3. The distinction of old and new net-work is given up.
The state guarantees each company a minimum dividend
equal to that which it has paid in recent years. If the
amount available for dividends increases beyond a certain
fixed percentage, two thirds of the excess goes to the
state. This last provision is not new in France; but
previous conventions have only allowed the state one
half of such excess. The limits are placed so high as to be
almost inoperative. A glance at them will show what
profitable investments French railroad stocks have been :

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RAILROAD POLICY IN FRANCE, ' I99

Guaranteed

Point beyond

minimum

which state

per cent.

shares excess.

Northern

13.5

22.1

Mediterranean

II

15

Orleans

ii.i

14.4

Southern

10

12

Western

7.7

10

Eastern

. . . 7.1

10

It IS not easy to pass judgment on the effects of the
French system. One thing the figures just given show
plainly enough ; that it gives the high profits to the rail-
roads.* In so far as this result is reached by preventing
waste of capital it is good. In so far as it is reached by
not building new lines to develop new business, it is bad.
In France both these effects are so mixed that it is im-
possible to separate them.

Up to a certain point, extension of railroad enterprise,
whether in the way of construction, facilities, or general
policy, is good for the railroads and the community both.
For a long distance beyond this point, it on the whole
continues to benefit the community, but on the whole
does not increase railroad profits, tending rather to dimin-
ish them. Finally, we reach a point beyond which any
additional construction does the community little good
and some harm, while to many of the railroads it means
absolute ruin.

The system of free competition in the United States
tends to keep railroad enterprise near the last point. The
system of non-competition in France tends to keep it
from advancing much beyond the first point. And as the
abuse of insolvent competition in the United States oc-
casionally carries us beyond the last point, so the abuse

^ Or at any rate to their stockholders. By far the greater part of the
capital invested was fumbhed by bondholders at a comparatively low rate of
interest.

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2CX> RAILROAD TRANSPORTATION.

of monopoly privileges in France occasionally prevents rail-
roads from reaching the first point. In spite of all that can
be done in the way of state control, the recognition of
monopoly rights puts the railroads at an unfair advantage
in dealing with the public. They can refuse to do what
does not suit their own convenience, and persist in their
refusal until the public makes favorable terms with them.
Such settlements cannot be made once for all. New con-
ditions arise requiring new measures. What was good in
i860 was inadequate in 1880. What is good in 1885 will
probably be quite inadequate in 1900. Each new settle-
ment gives the railroads opportunity for new advantages.
In 1842 it was a subsidy ; in 1852, an extension of charter
privileges; in 1859, a guarantee on bonds; in 1883, a
guarantee of dividends. The French monopolist has at
least as much inducement to underdo the matter of rail-
road enterprise as the American speculator has to overdo
it.

Considering the strong position of the French railroad
monopolies, the wonder is that the French Government
is able to exercise such efficient control as it does.
In certain respects this control is really admirable. No
other country has in its civil service such a body of
trained engineers and inspectors. But even at best there
is a certain lack of elasticity in all these matters. Indi-
vidual needs are sacrificed to general rules, individual
enterprise to general schemes. It is an interesting fact
that a railroad which is owned and managed by the state,
in its general policy is much more like our own railroads
than is a road which is owned by a private company, but
strictly controlled by state regulations. In the latter case,
the state has no direct interest in making exceptions to
its own rules. In the former case, it has. The rules

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RAILROAD POLICY IN FRANCE. 20f

li^ich a State will make for itself are therefore less rigid
than those which it will make for other people. This
difference is strikingly seen in comparing the development
of railroads in Belgium or Germany, where the state
actually owned the leading roads, with that in France,
where it merely controlled them. The former was much
more untrammelled.

Concerning railroad charges in France, there has been
less discussion than in some other countries.' The gen-
eral questions of railroad legislation have been treated
from the financial or political standpoint rather than from
the industrial one. There can be little doubt that the
general effect of the system has been to prevent reduction
in rates. If we take figures recently published by Charles
Baum,' a friendly critic, we find that the average charges
per ton-mile or passenger-mile have remained virtually
unchanged for many years. In the freight rate there was
actually a slight increase from 1872 to 1881. The rates
in the latter year were 1.55 cents per passenger-mile and
1.63 cents per ton-mile. These rates are on the whole
much higher than those of Belgium, probably somewhat
higher than -those of Germany, and somewhat lower than
those of Austria. Compared with the United States, they
are, of course, much lower for passengers, and much
higher for freight.

There seems to be no reason to doubt that in a country
with such natural resources and such industrial develop-
ment as France, the railroads might have done much
better than this. But it will not do to draw our conclu-
sions too strongly ; least of all when they involve a com-

' One of the best documents on this subject — ^Waddington's Report of
1880— is reproduced in full in the English Parliamentary Committee Report
of 1882, Appendix, No. 31.

' See Railroad Gautte, March 6, 1885.

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W2 RAILROAD TRANSPORTATION.

parison between different nations. The failure to lower
average rates is probably due largely to the failure to de-
velop long-distance traffic, as other nations have developed
it. Now» this lack of long-distance traffic is doubtless in
large measure a result of the railroad policy; but in
another sense, it is an independent fact by itself, and the
cause of the railroad policy instead of its result. Of all
nations on the highest industrial plane, France probably
depends least upon her long-distance traffic. By a series
of causes, chiefly natural, her industry has been so diversi-
fied that she can, to a large extent, live within herself. In
some respects she pays dearly for the privilege ; in other
respects she has a great advantage. The slowness in
certain matters of railroad development is but one mani-
festation of this general character of French industry.
We have perhaps done quite as badly in going to the
opposite extreme. We have done wonders in the way of
reducing rates, but the through freight has had the lion's
share of this benefit. Even when the local shipper gets
an actual reduction, he may be relatively worse off than
before. What the competition for through freight is
doing for our railroad interests we know only too well.
The average rates per ton-mile are any thing but an in-
fallible sign concerning a railroad's wisdom or a state's
prosperity.

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CHAPTER XL

THE RAILROAD SYSTEMS OF CENTRAL EUROPE.

LAck of system in Germany at the outset — Gradual acquisition of railroad
properly by Prussia — Growth of private lines, 1866-73 — Failure to
establish an imperial railroad system — Purchase of private roads by the
Prussian Government — Austrian history — Mistaken lines of policy — The
crisis of 1873 — Extension of state ownership in recent years — Early
enterprise of the Belgian Government — Period of active competition of
private railroads — Their absorption by the state system — Results of
Belgian railroad management.

M. M. V. Weber. Nationalitat und Eisenbahnpolitik, Vienna, 1876.

E. Sax. Die Eisenbahnen, Vienna, 1879, PP« 491-526.

In this chapter, as in chap, x., much of the material was inaccessible in
its original form, and had to be- taken at second-hand from journals like the
Archiv fUr EUenbahnwesen (Berlin), Zeitung des Vereins Deutscher Eisen-
hahn- VerwaHungen (Berlin) Oesterreischische Eisenbahn^Zeitung (Vienna),
Moniteurdes IntirtU MatirUU (Brussels).

The contrast between Germany and France, so manifest
in almost every department of history, could not fail to
show itself in the railroad systems of the two countries.
That of France was planned under a carefully devised
scheme. It radiated from Paris as a centre. It formed a
national net-work, where each part was subordinated to
the whole. That of Germany, on the other hand, grew
up without any comprehensive plan. The first lines did
not even come into communication with Berlin. They
were built as local lines to subserve local interests. This
was largely due to the political constitution of the coun-
try. The smaller states pursued their own way, each for

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204 RAILROAD TRANSPORTATION,

itself, Without regard to national development. They
were strong enough financially to adopt the policy of state
ownership and carry it out consistently. They actually
succeeded in doing what so many of our country towns
tried to do a few years ago by municipal subscriptions ;
that is, they secured railroad construction for the sake of
local interests, where mere business considerations would
not have caused railroads to be built. They thus obtained
a remarkably uniform development of lines all over the
country.

But it was not from these small states that a national
railroad policy was to come. The political ties which
bound them were too loose to admit of common action in
this matter. There was, it is true, a sort of federation of
railroads established, the " Verein Deutscher Eisenbahn-
Verwaltungen." This did extremely good work ; but it
dealt with matters of railroad administration rather than
railroad policy in the wider sense. There was but one
source whence a national railroad policy could arise, just
as there was but one source whence political unity could
come. The two movements centred in Prussia.

The original idea of the Prussian legislators ^eeiAs to
have been a combination of the French scheme of regu-
lated monopoly with the exploded English notion of com-
petition of different owners of rolling stock on the same
line of rails. The law of 1838 explicitly recognized rail-
road monopoly rights, protecting them for thirty years
against parallel railroad construction. But the scheme
was never consistently carried out as it was in France.

About 1842 the policy of subsidies came into vogue;
not on the French system, but in the form of guarantees
of interest. With these guarantees there was a further
proviso, that if the state was compelled to advance money

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 20$

in this way, it might, after a certain length of time, under-
take running the road itself. Other roads were indirectly
countenanced by the purchase of stock on the part of the
state, which was thus gradually carried on in the direction
of railroad ownership. The first absolutely state-built
and state-managed road was one from Berlin toward the
Russian frontier, begun in 1848. This was built on mili-
tary grounds, without much regard to business considera-
tions. Down to i860 the government continued building
a few roads, and at the same time quietly purchased a
good deal of railroad stock, devoting to that purpose the
proceeds of a special railroad tax.

With the advent of Bismarck to power in 1861, military
matters thrust industrial ones into the background. Even
the railroad tax was diverted to political purposes. The
consolidation of Germany into one nation by the wars of
1866 and 1870 created new lines of traffic, and a demand
for new railroads. These were largely built by private
companies. The Prussian administration was too much
occupied with other social and political questions to give
the railroad problem its final solution, or even to decide
upon its own ultimate policy in the matter. The time
preceding the crisis of 1873 was a period of active railroad
speculation, in which the state itself was a participant.
In Prussia, as in Belgium, state railroads were simply
roads owned by the state, but managed on the same prin-
ciples, and with the same abuses, as competing private
roads.

This was the condition of things down to 1874. At that
tin^e the German railroad system was a " mixed " one in
the fullest sense of the term. The small states had owned
their own roads, in large measure, from the outset. Pri-
vate enterprise had improvised connections and buil^

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206 RAILROAD TRANSPORTATION.

through lines. Prussia owned about one third of the rail-
roads within her borders. Some she had built for military
or political necessity, some she had acquired in the way of
business, some she had assumed when she annexed the
states that owned them.

Bismarck was far from satisfied. He wanted to see a
consistent state railroad system, and that not in the hands
of the individual governments, large or small, but in the
hands of the imperial power itself. He seems to have had
this idea in mind from the first. The power of the empire
to regulate railroads was established and defined in a
series of articles (§ 41-47) of the imperial constitution.
This was in 187 1. In 1873 a railroad commission (or
rather ** Railroad Department," Eisenbahnamt) was estab-
lished, consisting of seven members, having power to cany
out the provisions of the constitution — among which was
one providing for the regulation of rates, — to secure pub-
licity, and to do away with abuses. By this authority a
great deal has been done to secure unity in matters of
construction, signals, liability, etc. In the matter of rates
it has done comparatively little. This is practically not
under the control of the empire, but of the individual
states.*

The imperial authorities wanted to do more than control
the railroads; they wanted to own and manage them.
The first step in that direction was taken in the years 1870
and 1 87 1. When Alsace and Lorraine passed under
German sovereignty, the German Empire, as such, was

' We must not confuse the Prussian Government with that of the German
Empire, merely because the King of Prussia is ex-officio Emperor of
Germany. If the Governor of New York were ex-officio President of the
United States, the administrations, National and State, might still remain
entirely distinct, with distinct spheres and rights. Such is Actnally the caM
in Germany.

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RAILROAD SYSTEMS OF CENTRAL EUROPE, 20y

the only authority to take charge of the railroads of those
provinces, which could no longer remain under the man-
agement of the French company to which they had
hitherto belonged. This was but a beginning. Four
years afterward there was a strong agitation in favor of
transferring all railroads in all parts of Germany into the
hands of the empire. The project met with favor in
Prussia; but in other parts of Germany, especially in
Bavaria and Saxony, the states-rights feeling was too
strong, and the plan was after a time abandoned.

Foiled in his purpose of a German state system of roads,
Bismarck attempted to widen the Prussian state system ;
and here he succeeded completely.* In 1878 there were
only about three thousand miles of state-owned roads;
two thousand miles more were owned by private com-
panies but managed by the state, while six thousand
miles, or more than half, were under private ownership
and management both. The state roads themselves were
rendered less powerful than the mere figures would indi-
cate, because they were divided into two practically
unconnected systems, the Eastern and the Western.
This defect was remedied in the autumn of 1879, when
the government, by a series of purchases, obtained control
of two important east-and-west trunk lines connecting
Berlin with Cologne. At the same time a number of
other roads passed into government hands. The tendency
was too strong to be resisted by the private companies.
By the close of the year 1881 the government virtually
owned seven thousand miles of road, besides managing
two thousand miles more; while there were little more
than three thousand miles left in the hands of private

' A. v. d. Leyen : Die Durchfahrang des Staatsbahnsystems in Preussen.
Jakrb,/. Gesttzgebung (1^%^), vii., 2, 89-139.

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208 RAILROAD TRANSPORTATION.

companies. Two of these companies were financially very
strong — the " Anhalt " line connecting Berlin with the
south, and the Hamburg line toward the northwest. But the
government was resolved not to leave its work incomplete.
The Anhalt road was purchased in 1882, the Hamburg
road in 1884. There are now in Prussia about 13,000
miles of state roads and only 1,000 miles of private roads.

The prices paid were liberal, and sometimes extremely
high. The stockholders of the Berlin-Hamburg Company
secured an income of over 16 per cent.* on the investment;
this was decidedly the highest price paid for any road.
The purchase was generally made by exchanging for the
securities of the roads Prussian 4-per*cent bonds in such
amounts as should give the holders about the same in-
come that they would presumably have received had the
roads remained in private hands. There was no com-
pulsion exercised. The government offered prices which
made it worth while for the companies to sell. The
government had a technical right to take the property at
a valuation, but it seemed better to make a slight
pecuniary sacrifice rather than incur the odium of enfon
cing this right.

Prussia is now the typical example of state railroad
ownership. Of Prussian railroad employes, nearly 80,000
are regularly appointed members of the civil service, with
special rights and duties as such. The railroads are made
to subserve political and military purposes quite as much
as commercial ones. To examine and pass judgment
upon Prussian management or Prussian rates, is virtually
to pass judgment on state railroad ownership as a S3rstem.

Railroad development in Austria ' has been more or less

' In conjunction with a cash payment, which makes the actual return
about 17 per cent.
' Th. Haberer : '* Geschichte d€8 £iMllbahnwesens»" Vienna, 1884.

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 209

closely connected with that in Germany ; but the changes in
Austria's political history, and the weakness of her treasury,
have made her policy much less consistent. When rail-
roads were first invented, Austria was the home of bigoted
conservatism. The Austrian court and statesmen looked
upon the new contrivance with a distrust which was from
their point of view well founded. Such rapid movement
seemed to savor of dangerous radicalism, not to say revo-
lution. The Emperor in 183^ made up his mind to sign a
railroad charter only on the somewhat dubious ground
that " the thing can't maintain itself, anyhow." '

Railroads insisted on coming whether monarchical
governments liked them or riot; and they did so much
good when they came that the government soon decided
that they were a good thing, and gave them paternal
assistance, either in the form of guarantees of interest or
of direct state construction. This period in Austria lasted
from about 1840 to 1848 ; it was a time of active railroad
building. The revolution of 1848 and the Hungarian war
threw all industry into confusion. Under these circum-
stances Austria pursued exactly the opposite policy to
that of Prussia. The Prussian Government tried to help
railroads by buying them at low prices; the Austrian
Government, by selling them at low prices. There can be
little doubt that the Austrian Government during this
period was greatly influenced by the example of France,
and desired not to own its roads, but to have them owned

' We must, however, give Austria the credit of being the first country to
enact a general railroad law. It provided for a detailed form of previous
application ; for the time limits of the charter ; for publicity of rates ; and
for reduction in rates in case profits exceeded fifteen per cent. It guaranteed
the company against the construction of parallel lines. This law was passed
in 1838. Prussia passed a somewhat similar law a few months later. Bog-
land had nothing of the kind till 1845.

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210 RAILROAD TRANSPORTATION.

and built by private companies, in systems radiating from
Vienna, as the French lines radiated from Paris.

The system was one which did not bear transplanting.
It had grown up, and had been found serviceable in
France, because France was so closely knit together, and
centred around Paris so completely. In Austria it was
quite different. The country consists of many distinct
states, not even bound together by ties of language or of
race. That Vienna is the seat of government for them
all, is scarcely more than a political accident. The condi-
tions of trade are in many respects like those of the
United States. They have their international cattle
trade and grain trade ; their combined rail and water
routes on export business ; their inter-state commerce
troubles, and their Granger troubles. They have a water
route of dominant importance — the Danube — competing
with their east and west trunk lines. With these and
many other through-business complications, it is easy to
see that the example of France could only prove mislead-
ing. They succeeded in appropriating some of its evil
results with none of its good ones. The state sold many
lines in 1853 at about half their cost of construction. So
far was this from stimulating the enterprise of private
companies, that in 1859 some of the most important con-
necting links in Austria's trunk-line system were but half
built. Her decisive defeat by France in that year was
largely due to the unreadiness of her railroad system ; and
the same thing made itself felt to a less extent in the war
with Prussia in 1866.

The period of listlessness, which ended about the time
of the war with Prussia, was followed by a period of wild
speculation, which did not end until the crisis of 1873.
In spite of stringent legal provisions, the same abuses

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 211

manifested themselves in Austria that had been found in
other countries with fewer laws. Construction companies
were numerous, and left such a bad name that to call
a man " a constructor" is in Germany far more oppro-
brious than to call him a liar. One example will suffice
to show the recklessness, or rather light-headedness, of
Austrian speculation at this time. It is all the more
noticeable because Haberer, in his " Railroad History/'
relates it as if it were the most natural thing in the
world.

"The crisis of 1873 brought to light a serious defect in
Austrian law. While one concern after another went
under, the holders of bonds or debentures were resting
quietly in the belief that their interests were secured.
But when one and another of these roads became unable
to pay their interest, the matter was looked into thor-
oughly, and it was found that the whole debt was unse-
cured ; for although there were nominal mortgages on the
property, these mortgages had no legal authority, because
they were not recorded in the manner prescribed by law." '

The prostration which followed the crisis of 1873 al-
most forced Austria into a policy of active state interfer-
ence. This soon took the direction of extension of state
ownership, In Hungary this policy had never been com-
pletely abandoned. In Austria itself it had been out of
favor for twenty years ; and this fact, combined with the
not over-prosperous condition of the Austrian treasury,
made it impossible to move rapidly. Three quarters of

1 Haberer : " Geschichte des Eisenbahnwesens," p. 123. Inasmuch as the
whole railroad indebtedness of Austria seems to have suffered from this law,
it might be regarded as a discovery of some importance. To be sure, there
was a paternal government at hand to set it all right. But if this repre-
sents Austrian ways of doing business, Vienna ought to offer a good field for
some enterprisiiig American lawyers.

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212 RAILROAD TRANSPORTATION.

the lines are still in the hands of private companies ; and
although matters unquestionably tend in the direction of
state management, it is as yet impossible to say how far
this tendency will go. Still less is it possible to pass any
judgment on the results of the policy upon rates, or upon
nationaj development. It is all, or nearly all, a matter of
the future. Even in Prussia the results are yet far from
definite. If we wish to see a state railroad system which
has a past as well as a present and future, we must turn
from Germany to Belgium.

Of all countries in the world Belgium probably offered
the best advantages for a state railroad system. The
industry of the country was active and varied. Of a
large body of local traffic its railroads were thus sure; and
they lay in a position to secure a large share of the tran-
sit trade between England and Germany. There was
almost no possibility of mistake in locating the main rail-
roads. The centres of industry were well defined; the
main lines of trade almost equally well defined. The
construction of railroads was easy, a large part of the
country being nearly level ; almost too easy, in fact, for the
very facility of construction offered an inducement to
competing or parallel railroads. The government was
admirably suited for railroad supervision and manage-
ment. It was enlightened and progressive, sufficiently
centralized to be strong, yet popular enough to feel popu-
lar demands. The country was large enough to have an
independent policy, not so large that local interests
would be sacrificed to that policy. Its credit was excel-
lent, so that it had no difficulty in raising whatever
money was needed for public works.

Although Belgium was on the direct line between
Germany and London, a large part of the traffic had gone

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 21 3.

via Holland, because of the easy navigation of the Rhine
to its very mouth. The substitution of rail for water as a
means of communication, gave Belgium the opportunity
to compete for this traffic. The Belgian Government was
quick to avail itself of this opportunity.* King Leopold
was familiar with England and English business; he fore-
saw the probable future of the railroad, and he was all the
more in a hurry to act, fron> the fear that certain hated
Dutch capitalists might get the start of him. Railroad
work was actively begun as early as 1833. The govern-
ment chose the main lines of traffic, and built its roads
there ; from Antwerp on the north to the iron and coal
regions on the south ; from Li^ge, near the German fron-
tier, to Ostend, the most available point for shipment for
England. Private companies were allowed to build lines
whenever the state did not choose to undertake the
work ; they thus furnished a system of branches and con-
nections. In the crisis of 1848 the government went so
far as to subsidize some of these private lines. The sys-
tem as originally designed was virtually complete in 1850.
The early arrangements were admirable for the time in
which they were devised. But they were not changed to
keep pace with progress elsewhere. The Belgian system
of reports and statistics when first adopted was the best
in the world ; a generation later it was one of the worst.
In their engineering arrangements, machine shops, etc.,
what was at first admirable precision soon became intoler-
able old-fogyism.' The same conservatism for a time
showed itself in the matter of rates.* Down to 1853 there

' Adams : Railroads, pp. 94 ff.

• Report of le Hardy de Beaulieu, Section Centrale, 1880.

' Charles Baum (Annales de$ Fonts et Chaussdes, March, 1882) furnishes
strong testimony as to the facts, though he is far from holding the system of
state management responsible.

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214 RAILROAD TRANSPORTATION.

was no system of charges adapted to the wants of busi-
ness ; only the crudest kind of pro-rata tariff, with little
or no classification.

A radical change in this respect was made at the time
when the competition of private companies began to make
itself felt. The state stopped building railroads in 1850.
Private companies began building faster than ever. For
nearly twenty years the government system remained all
but stationary, with a length of about 350 miles. The
private railroads increased from less than 200 miles in
1850 to 700 in i860, and 1400 in 1870. This growth of
private railroads was accompanied by their consolidation
into powerful systems. Instead of being mere local
branches or feeders to the state lines, they had now
become rivals for the same through traffic ; not quite so
well situated, but strong enough to compete actively.
With the year 1856 began a period of railroad wars. So
far from exercising a dominant influence in railroad
tariffs, the state was for the time being completely power-
less against the current of events. It abandoned schedule
rates, and had recourse to personal discrimination and to
special contracts of every kind.' It is probable that in
these respects the state was a worse offender than the
private companies themselves.

It is a curious fact that in any such competition the
state is not stronger than private companies, but weaker.
Theoretically, it may have the power to forbid private
companies engaging in such competition. Practically,
public opinion will not ?illow it to exercise that power.
Nor can the state railroads exercise a dignified reserve. If

'The govemment raUroads themselves granted special rates to prevent
people from using the government's own canals. See Rep. of Joint Select
(Parliamentary) Conmiittee of 1872, App., p. 787.

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 21$

private railroads are run to make money, and succeed in
doing it, the state railroads must be run to make money
too, or else the authorities will haVe to face the criticism
of an indignant public. And in this money-making race
it is impossible for the government to have the same quick
elasticity of action as a private company. Thus it hap-
pened that the competition in Belgium Was quite even.
The state had somewhat better routes; but the advan-
tages possessed by private companies in a business fight
just about offset this difference.

During the times of active railroad war, the lowering of
rates, especially for long distances and for low-class goods,
was astonishingly rapid. The results obtained in Belgium
in the years 1861-65 were even more remarkable than
those reached in the United States some years later. The
average freight charge per ton-mile was reduced to about
1.3 cents ; the average rate per passenger-mile was even
lower. The stress of competition developed such active
business management among the railroads that they were
able to work with profit at these rates.

Yet this state of things, while seemingly good, was in-
tolerable to the government. The competition of private
companies gave it no chance for an independent policy.
The political success was not what was generally sup-
posed by the outside world. To Americans, the condition
of the Belgian system at that time was known chiefly
through the reports of the Massachusetts Commission,
and this commission, without the least intentional unfair-
ness, was disposed to look at all these matters in a rose-
colored light, because they were desirous that Massachu-
setts should follow the example of Belgium/ They

> Massachusetts Reports ii., 52, 53 ; iv., 67-70, 80, 81. Six years later,
Mr. Adams (" Railroads/* p. 99) very candidly qualifies the yiews expressed
in those reports.

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2l6 RAILROAD TRANSPORTATION.

therefore accepted the Belgian authorities' reports of their
own work, without subjecting them to criticism — a dan-
gerous thing to do. The fact is that the Belgian state
railroad system, during the time of active competition,
was occupied with something else than questions of pub-
lic policy. It was occupied with making money. It was
a responsible and well-conducted company, managed on
business principles. It differed from other companies
only in the fact that its revenues accrued to the state, and
its officials held their appointments from the state.

When the government wanted to obtain real influence
as a railroad owner, it bought up most of the competing
lines, and made long pooling arrangements with the re-
mainder. This began in 1870; the largest purchases were
made about 1873. In 1874 the government owned more
than half the mileage of the country ; in 1880 it owned
two thirds ; now it owns about three quarters. The Bel-
gian system of 1885 is ^ totally different thing from the
Belgian system of 1869.

In judging the railroad policy of Belgium by its results,
all must unite in admitting that they are in many respects
extraordinarily good. What their average rates are, we
have already seen. The passenger rates are lower than
anywhere else in the world, except, perhaps, on some East
Indian railroads. The freight rates are much lower than
anywhere else in Europe. Nominally they are about the
same as in the United States. Practically they are lower
for almost any given service, because Belgium does not
have the enormous long-distance traffic which brings
down the average in the United States.

Their classification is also excellent. They have now
got matters into such shape that the schedules themselves
(which go quite into details) furnish a system of rates

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RAILROAD SYSTEMS OF CENTRAL EUROPE. 21^

adapted to the wants of different lines of business and of
different localities. What their rates have done for the
development of business is strikingly seen in the history
of the port of Antwerp, which is rapidly outstripping the
somewhat similarly situated French port of Havre — a dif-
ference which is thought to be largely due to the different
railroad policy of the two countries.

It is also true that they make a great deal of use of
their investment. The average car-load is higher than in
either Germany or France, though the construction is the
same. The high percentage of expenses to earnings,
which is often quoted against them, is really, prima facte^
in their favor. If a country where the state has a virtual
monopoly of railroads shows too small a percentage of
operating expenses, it gives good ground for the belief
that rates are unnecessarily high, and that industrial inter-
ests are being sacrificed to financial ones.

On the other hand, it would be a mistake to use these re-
sults as a strong argument in favor of state management.
The progress was made during a period of active competi-
tion, when private companies took the lead. The founda-
tions were laid in 1853, when competition was beginning.
The system developed itself most rapidly in 1861-65,
when competition was at its height. Since the state has
purchased rival lines, and has had a virtual monopoly,
there seems to have been a diminution of activity, and a
tendency toward slackness of management. There has
been a lowering of profits without corresponding change
of rates. Great complaints are made of the lack of cars
where they are wanted. Much more serious charges are
made by certain high authorities like Le Hardy de Beau-
lieu.' He asserts that the connection between railroads

' Reports, Section Centrale, 1880, 1881.

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21 8 RAILROAD TRANSPORTATION,

and politics has produced distinctly bad results ; that
there has been a multiplication of forms and offices of no
use in actual business, and that there have been serious
manipulations of accounts to make an unduly favorable
showing for the government. At this distance it is im-
possible to investigate these charges ; but they have been
made in official form by one of the best authorities in
Belgium.

While not withholding the freest praise from the Bel-
gian system, we may fairly ascribe much of its success to
other causes than enlightened state management or delib-
erate public policy.

The railroad history of other European countries is
for the most part of much less importance.* Some — like
Denmark, Norway, or Sweden — show a tolerably well-de-
fined policy, but not an extensive or important system of
railroads. Others — like Russia, Spain, or, in some senses,
Switzerland, — have important lines, but no well-defined
principles of management."

The case of Italy stands by itself, and must be treated
separately. The Italian railroads, regarded simply as rail-
roads, will not compare in importance with those of Ger-
many or France. Nor has railroad economy and adminis-
tration been developed in Italy as in Northern Europe.
But from the political and social standpoint the Italian
railroad history is of the very highest interest, and may
well be made the subject of a separate chapter.

' An exception should be made in the case of Holland, whose railroad
history, though less important than that of Belgium, presents points of great
interest.

* One important principle has prevailed all but universally. The railroad
charters of Continental Europe are granted only for a term of years— not
indefinitely.

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CHAPTER XII.

RAILROAD LEGISLATION IN ITALY.

Reasons for its importance — Mistaken policy at the outset — Necessity for
government action — Purchase of the railroads by the state — Questions
regarding their operation — ^The commission of 1878 and its work — Con-
clusions unfavorable to state railroad management — Necessity for im-
mediate action*-Lease of the railroads to private companies — Details
of the contract — Probable result.

*'Atti della Commissione d'Inchiesta suU' Esercizio delle Ferrovie
Italiane." 7 volumes, 188 1.

Cucheval-Clarigny : Les Chemins de Fer Italiens. Reime des Deux
Mondes, July i and 15, 1884.

It seems like going far out of our way to look to Italy
for lessons in railroad policy. One might think that the
system and the problems connected with it are so different
from our own that only mere curiosity could lead us to
study its workings. As far as practical usefulness is con-
cerned, we might suppose it to be a waste of time.

We should make a great mistake. Events have oc-
curred in Italy in the last few years which have an import-
ant bearing on railroad legislation everywhere. A par-
liamentary commission in Italy a few years ago held the
most thorough railroad investigation ever made in the
world. As a result of their investigation they concluded
that the state ought not to run railroads ; that although
Italy owned its railroads, it ought at once to charter large
private companies to manage them. And they have since
been occupied with legislation which is to give efifect to

219

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220 RAILROAD TRANSPORTATION'.

these ideas. It is the most decided set-back which the
growing tendency toward state railroad management has
anywhere received.

Nothing in all this is done at haphazard. When peo-
ple in England or America talk about state railroads,
it is generally mere guesswork. But in Italy it is the
result of hard-won experience. They have tried state
railroads and private railroads both, and they know what
they are talking about. In fact, they have tried almost
every possible relation between the state and the railroads.
Each of three or four main systems received its original
charter from a different government. One derived its
being from the Emperor of Austria, another from the
Pope. Each charter has been amended over and over
again. There has been state assistance of every kind —
guarantees of interest, advances of capital, subsidies for
building, subsidies for running. The state has built
some of the roads. Others it has bought and paid for.
Others it has bought and not paid for. It has tried
various forms of management — direct state action, lease,
and participation in profits. When an Italian Commis-
sion speaks of the relation between the state and the
railroads, it speaks from experience.

The conclusions of the Italian Commission are the
work of cautious and responsible men, who are busy car-
rying them out in the face of great difficulties. There is
no room for experiments. The Italian Government finds
it hard work to make both ends meet, and has no money
to spend on mistakes. The railroads are not very profita-
ble at best, and any unwise legislation is liable to bring
them to the point where they cannot be run at all.

To understand the present state of things we must look
back at Italian railroad history. Up to 1859 Italy was

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RAILROAD LEGISLATION IN ITALY, 221

divided into a number of very small states. As far as
there were any railroads at all, each state had its own
separate system. The systems were not merely inde-
pendent but isolated ; the ' railroads of Tuscany did not
reach those of Rome, those of Rome did not reach those
of Naples. They were all local roads in the narrowest
sense. The wars from 1859 ^^ 1870 put an end to this
state of things. Connecting links were built, and with
them came the inevitable tendency to consolidation.
But this was not allowed to take its natural course.
The through traffic of Italy runs from northwest to
southeast ; that is, it runs lengthwise of the peninsula, or
parallel to the central mountain chain. But the old politi-
cal divisions ran crosswise. They did not want to see
their railroads become intermediate links in a line of
through communication ; they wanted them to be inde-
pendent. And besides this local pride, an element of
national pride came in also. The men who were planning
through routes were foreigners. Italy was herself too
poor to go into such enterprises on a large scale ; but she
was sensitive, and was afraid to see foreign capital gain a
strong foothold within her borders. If Rothschild and Tala-
bot had been allowed to carry out their plans, Italy would
probably have had a strong and progressive railroad sys-
tem. -A t any rate it would have been organized on the
natural lines. But the Italians sacrificed commercial
advantage to sentiment — most of it false sentiment at
that.

Without going into details, the final result was the con-
solidation of most of the Italian railroads into four systems
— the Upper Italian, the Roman, the so-called Southern
(Eastern would be a truer title), and — somewhat later—
. the system of Calabria and Sicily. The main lines of this

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222 RAILROAD TRANSPORTATION.

division were marked out as early as 1864, and have con.
tinued without much change ever since. The principles
of consolidation favored by the state have been entirely
different from those of other countries. They have con.
solidated the competing lines and not the connecting
ones. It is almost as if New York had one united system
of railroads, Pennsylvania a second, and Ohio a third,
absolutely distinct from the other two, and with only
cumbersome means for interchange of traffic.

Of course this was a wasteful way of doing things. In
the first place, the handling of the through business was
bad ; and, secondly, since each road was officered by men
from one locality, they could not judge when it was worth
while to lower through rates to develop business. But if
ever the railroads of any country needed to handle and de-
velop their business with the utmost care, it was the railroads
of Italy. It spite of large subsidies from government, they
found it extremely difficult to meet their obligations. In
times of commercial distress the conditions of the charters
had to be altered; sometimes the government had to
come to the rescue with its credit or money.

The lines of Calabria and Sicily were the worst off.
They were built but slowly, and could not pay expenses.
The government saw themselves forced to choose between
giving up the development of this part of the country
altogether, or taking the railroads into their own hands. In
1870 they chose the latter alternative ; owning or building
the roads themselves, but running them through the me-
dium of a company which receives its pay in the form of a
percentage of the gross receipts, all expenses being paid
by the state. The average annual gross receipts are in the
neighborhood of $2,oao per mile ; the operating expenses,
some $3,000 per mile. Thus the government loses a

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RAILROAD LEGISLATION IN ITALY, 223

thousand dollars a mile annually, besides receiving no
interest on the capital invested. And these things seem
to improve but slowly.

The Roman railroads did scarcely better, and after
many unsuccessful attempts to prop them up by pecuniary
assistance, the state in 1873 entered upon a contract to
purchase them. But the financial difficulties of the gov-
ernment itself were such that it was not until 1880 that
arrangements could be made to fulfil the contract, nor did
government take possession till the year 1882.

The Southern railroad formed a rather surprising excep-
tion to the general lack of prosperity. It ran along the
coast of the Adriatic, through the poorer districts of
Italy; it had no towns of first-rate importance on its
main route. It was regarded as the most unpromising
line in the kingdom. But it had a tolerably long line in
the natural direction of through traffic, having formed an
important part in the system proposed by Talabot and
Rothschild in 1863; and it was managed by men who
knew how to make the most of its advantages. They had
dared to take the lead in the matter of tariff reduction,
even when violently opposed by the government; and
they were rewarded by a growth of business which far ex-
ceeded their expectations, and which finally threatened to
become a means of pecuniary loss to them. For their
subsidy contract was a somewhat peculiar one. When it
was made, the company had no idea of ever earning
$5,000 per mile annually; and the contract, as a mere
matter of form, provided that after the gross earnings had
reached $5,000 a mile the subsidy should diminish as fast
as the gross earnings increased. But the net earnings
never would increase by quite as large a sum as the gross
earnings ; the subsidy would diminish faster than the net

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224 RAILROAD TRANSPORTATION.

earnings would increase. Thus, every bit of traffic beyond
$5,000 per mile lessened the amount available for the pay-
ment of dividends. Such a state of things was bad for
business in everyway, and could not last. But the govern-
ment was not willing, at the time, to make any changes in
the subsidy contract which should ever render it liable to
pay more, and the company was equally set against any
changes which might render it liable to receive less. The
only way open was for the government to buy out the
company, and in 1874 and 1876 contracts to that end
were agreed upon, though subsequent events hindered
their full execution.

Meantime the government was being drawn into ar-
rangements for the purchase of the railroads in Upper
Italy. Here it was not on account of business complica-
tions, good or bad, but for political reasons. The countries
of North Italy, while still under Austrian rule, had been
provided with a tolerably complete system of railroads,
These were in the hands of an Austrian company which
owned other lines farther to the north and east. When
part of its lines passed under the Italian Government, the
company arranged two separate organizations, one for its
Austrian lines, the other for its Italian lines. But of
course the same stockholders controlled both organiza-
tions ; and the two nations, which might at any moment
become enemies, disliked to have their territories connected
by such intimate financial interests. The company must
become Austrian or Italian — one or the other ; whichever
it was to be, the other part must be bought out and
separated from the company. Austria felt that she could
not buy up her part of the lines and leave the company
Italian. Italy was perhaps no better able than Austria,
but she was more enterprising ; she undertook to buy up

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RAILROAD LEGISLATION IN ITALY. 22$

her part, and leave the company Austrian. Matters be-
gan to take that direction in 1873. At the end of 1875
the arrangements were practically complete.

At that time the triumph of the state railroad principle
in Italy seemed as thorough as it was in Belgium or in
Gennany. For one reason or another each important
company had been led to abandon its chartered rights.
The purchases had not been effected, but there were
contracts which must soon lead to purchase. After pur-
chase there must apparently come more immediate state
interest and control. Few men could suspect what a
different turn the practical management of things was
soon to take.

It was a conservative ministry that had purchased or
arranged to purchase the railroads ; and the ministers who
took the lead in this matter, Minghetti and Spaventa, un-
doubtedly intended that the state should run the railroads
as well as own theni. But political changes prevented
their carrying out this part of the programme. They
were forced to resign in 1876, and were succeeded by
moderate Radicals. In the course of the same year, after
a long debate, the Italian Parliament decided that it was
unwise for the state at that time to attempt to manage
its own railroads directly, and Depretis, the Minister, was
requested to prepare a plan under which the state rail-
roads might be given over to private companies for man-
agement.

On what terms should this be done ? This was a central
point in the whole question, and might be answered in
two quite distinct ways. Either the state might pay the
companies for doing the work, and take what was left
itself; or the companies might pay the state for the use
of its lines, and take what was left themselves. In the

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226* RAILROAD TRANSPORTATION.

first case the state would take the risk, in the second case
the companies. In the first case the company would be
a mere agent or employ^, in the second case a leaseholder.
In the second case the state ownership would be little
more than a form, as far as concerns its influence on the
practical management of affairs. The partisans of a state
railroad system would not be satisfied with it.

The Conservative ministers in their provisional arrange-
ments had made contracts of the first form. The com-
panies were to be mere agents to manage roads at the
risk of the government. A contract in this sense was
arranged with the Southern railroad, though the ministry
fell before it could be approved by Parliament. It pro-
vided that the working company should be liable for
operating expenses, including ordinary repairs, but not for
extraordinary repairs or new construction. For repairs
and maintenance it was to receive a fixed allowance per
mile operated ; for train expenses (and profits) it received
an allowance, for each passenger and each ton of freight,
for every mile carried. Further, to stimulate its activity,
the company was to be allowed a moderate share in any
increase of the gross receipts above a certain sum men-
tioned in the contract.

This system was never carried out. The new Minister,
Depretis, preferred the plan of leases. He proposed that
there should be two lessee companies, one running the
roads on the east coast and their connections, the other
those on the west coast ; that the lessees should own the
rolling stock, buying at a valuation what the state had
now in its possession ; that they should pay the state
(together) a fixed minimum rent of about nine million
dollars: with a variety of minor details. This rental
represented about two per cent, on the cost of the
roads. It amounted to thirty per cent, of the estimated

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RAILROAD LEGISLATION IN ITALY. 22/

minimum gross receipts. The state was to have a con-
siderable interest in any excess of gross receipts above
this minimum.

All things considered, this was a good plan. Many of
its ideas are incorporated in the bill recently passed by
Parliament. But, for the time being, Depretis had no
better luck than his predecessor. The extreme Radicals
turned out the moderate Radicals at this stage of events,
just as two years before the moderate Radicals had turned
out the Conservatives. And the extreme Radicals were
so far under the influence of socialistic ideas that the prin-
ciple of state railroad management found favor with many
of them. But they were not quite ready for any action,
and in July, 1878, referred the whole matter to a special
commission.

The Commission of 1878 went to work systematically.
It began by circulating throughout Italy, among all classes
of men who had any thing to do with railroads, a series of
nearly two hundred printed questions, to any or all of
which they invited answers, oral or written. Every effort
was made to set people thinking on the subject, and to
receive answers from all quarters. The questions were
made so precise that a man who had one piece of special
information might send an answer to one question and let
the rest go. An enormous mass of material was thus col-
lected; and it was not until the year 1881 that the com-
mission was able to finish its work. The result of its
labors is embodied in seven quarto volumes. Three
contain the oral testimony ; three more give a digest of
the written answers and other material used ; the seventh
is the report itself. In connection with this immense
work, lasting between two and three years, it is interest-
ing to know that the total expense involved was about
$27,000.

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228 RAILROAD TRANSPORTATION,

The three volumes of oral testimony are of no great
interest outside of Italy. It is not so with the digest of
materials. This takes up railroad problems in their more
general aspects, making use of documents and information
from almost every country in Europe. There are detailed
studies of the working of state railroad management ; of
the different forms of government interference ; of varia-
tions in operating expenses; of the theory of railroad
rates, and the probable effect of any changes ; with num-
berless other points of general interest. It is a pity that
the fact of its being written in Italian makes it unavailable
for so many who might otherwise be glad to use it.'

The outcome of these studies was the rejection by the
commission of the idea that it was a proper function of
the state to run railroads.

There had been no lack of argument brought before the
commission in favor of a state railroad system. There
were the general arguments about monopoly, speculation,
arbitrary power, with which we are all familiar. There
were special arguments which applied to Italy alone.
There were strong men to back them ; but both the men
and the arguments on the other side were stronger. It is
a noticeable fact that the majority of the chambers of
commerce were opposed to government management;
especially strong was this opposition from the Chamber
of Commerce of Milan, probably the place where both
systems had been tried most fully.

The more interesting points in the report may be
summed up as follows:

I. Most of the pleas for state management are based
upon the idea that the state would perform many services
much cheaper than they are performed by private compa-

' A French translation of part of it has been published.

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RAILROAD LEGISLA TION IN ITAL Y. 229

nies. This is a mistake. The tendency is decidedly the
other way. Private companies can do for their patrons
many things which the state cannot ; but it is doubtful
whether the state would be justified in doing any thing
of the sort, which private companies cannot. The state is
much more likely to attempt to tax industry than to foster
it. And when it attempts to tax industry it is more om-
nipotent and less responsible than a private corporation.

2. State management is more costly than private man-
agement. Such at least was the conclusion of the com-
mission, on comparing the results of the two systems.
The differences which they bring out are quite marked,
though it is fairly open to question just how much they
prove. Comparing state and private railroads in different
countries, they find that the ratio of operating expenses
to gross earnings is always greater on state railroads —
averaging 1 1 per cent, more in all the countries compared.
In their more detailed comparisons, the commission take
carefully into account the various elements which involve
cost of handling ; but unfortunately they do not take up
the question whether the rates charged on the state rail-
roads considered may not be lower than on the private
railroads— a thing which would make the percentage look
unfavorable, and yet be rather a credit to the manage-
ment than otherwise. We cannot, therefore, accept this
point without reserve.

3. The political dangers would be very great. Politics
would corrupt the railroad management, and the railroad
management would corrupt politics. These effects have
already been seen in actual working. Changes of rates
are made for the sake of influencing elections. A ques-
tionable experiment was recently made in Belgium in the
matter of railroad tariffs; it had been adopted by the

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230 RAILROAD TRANSPORTATION.

government as a means of currying popular favor — a kind
of bribery to which there is great temptation. It would
not be hard to find similar instances in other countries
on both sides of the Atlantic.

If then the state railroads are to be operated by private
companies,' we come back to the question, on what terms ?
Lease, or salaried management at the risk of the state ?
As between the two, the commission preferred the idea
of lease, but it did not commit itself to either ; it chose a
middle ground, devising an elaborate scheme of participa-
tion of earnings. The leading ideas of this scheme are
embodied in the contracts ultimately approved by the
Italian Parliament.

While the commission was studying the question, mat-
ters were coming to the point where practical solution was
growing every hour more necessary.

1. Where the companies were still managing, the rolling
stock began to gfive out. The companies whose roads had
been purchased by the state were still in part operating
them provisionally from year to year ; but they never
knew what turn Italian railroad policy might take, so that
no one was ready to spend any money now for the sake
of the future interests of the roads. The rolling stock had
not kept pace with the growth of business; on many-
lines they were not even attending to renewals. As a re-
sult, cars and engines were wearing out very fast ; they
were already inadequate to the public service, and were
growing worse each year.

2. Where the state tried to manage its own roads, it was
making a bad failure. This was specially noticeable in
the railroads of North Italy. For two or three years after

* The commission would have been glad to have the state get rid of its
railroads altogether ; but this was, under the circumstances, impossible.

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RAILROAD LEGISLATION IN ITALY, 23 1

the purchase by the state, the company had continued pro-
visionally to run the roads. But in July, 1878, just the
time when the commission was appointed, the road was
taken out of their hands altogether, and run by the state
directly. The ministry were going to show people how to
run a railroad, and prove that the state could do it better
than anybody else. Unfortunately the event proved just
the opposite. The road began to go to pieces. Before
the change, the personnel of the railroad officials had been
first-rate, and animated by a vigorous spirit of activity ;
after the change their character went down, their activity
slackened. With the same resources they were no longer
able to handle the same business. There was a time
when the freight service of Lombardy was suspended for
every thing but perishable goods, simply because the road
could not manage the freight that was offered.

3. There were important financial reasons for a change.
The public treasury was in trouble, as is apt to be the case
in Italy. In the hard-won resumption of specie payments,
it had exhausted all its power. There were no reserve
resources. Every thing was taxed as high as it would
bear ; most things rather higher. The government bonds
were so depreciated that it could not borrow money
except at a great disadvantage. We have seen how many
years it took them to find the means of carrying out their
contract to purchase the Roman railroad. The Southern
railroad was still unpaid for. Some 3,000 miles of new
railroad construction, in addition to the 5,000 miles already
existing, had been voted in 1879; ^^^^ ^^ work was lan-
guishing for lack of funds. It was found almost impossible
to make the necessary additions to the rolling stock of
the existing railroads. Such were the financial elements
of the problem — apparently rather a hopeless one; the

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232 RAILROAD TRANSPORTATION.

State could get no money, the railroads were not par-
ticularly profitable: required, an arrangement by which
the state should get the money it needed for improve-
ments and extensions, and at the same time make arrange-
ments for the running of the railroads which should be
satisfactory to both parties.

The Minister of Public Works tried to gaiii time by
ielay, but only made matters worse. The Southern rail-
road declared that it could not allow the state to defer
payment any longer, and that the state had forfeited its
right to buy the road on the terms agreed. The result
has been that in order to control the road without owning
it, the state will have to pay the stockholders a larger
sum annually than the interest on the purchase money at
the agreed price.

While matters were in this state, about a year ago, the
office of Minister of Public Works was offered to the man
who had been Secretary of the Commission of 1878. He
went to work vigorously ; conferred again and again with
railroad men and financiers, and, as a result, came forward
in the spring of 1884, with a bill which, after a year's dis-
cussion, passed the Italian Parliament unaltered in its
general features. By contracts which went into effect
July I, 1885, the following principles were established:

I. The roads are to be operated, presumably ' for sixty
years, by two companies, nearly equal in strength, each
controlling a trunk-line system running northwest and
southeast.' They are to buy at a valuation (at a minimum
of about $50,000,000) the rolling stock now owned by the
state. They will keep it in repair at their own charge as

' The contract may be terminated by either party at the expiratioii of
twenty or forty years.

'A third company operates the railroads of Sicily, under a contract similar
in general form but differing slightly in details.

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RAILROAD LEGISLATION IN ITALY, 233

part of ordinary operating expenses, but will be entitled
to receive interest from the state on the sum paid for it.
By this sale the state will have a sum of money imme-
diately available for the necessary improvements and
extensions it has so long wanted to make. There are
provisions by which the operating companies are to aid
in this construction, borrowing money for that purpose.

2. The companies then are to pay for ordinary repairs
of rolling stock ; but what about repairs of line, or about
extraordinary expenditures ? It is hard enough for any
railroad to decide what should be charged to mainten-
ance, and what to construction account, even when the
two must ultimately come out of the same pocket ; but if
the railroad had to pay the maintenance and the govern-
ment the construction, the case would be infinitely worse.
The attempt to decide what should be charged to con-
struction account would give rise to contest and litigation
at every step. Powerless to meet the difficulty directly,
the Italians try to evade it ; and their provisions for that
purpose form the most interesting feature in the whole
biU.

All the system of division is based upon gross and not
net receipts. From the gross receipts deductions are to
be made in every instance for a series of reserve funds :
(i) $64 per mile for extraordinary repairs ; (2) $48 per mile
single track, or $80 per mile double track, for renewal of
rails ; (3) \\ per cent, for renewals of rolling stock. Actual
increase of material or accommodations is to be provided
for in a manner analogous to our car trusts; and the
means of meeting these obligations is to be provided by a
fourth fund " for property increase," derived from the
gross receipts in a more complicated manner.

3. It is estimated that the annual gross receipts will be

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234 RAILROAD TRANSPORTATION,

at least $i9,ooo,(X)0 for one company and $22,000,000 for
the other. In that case 62J per cent, will go to the com-
panies for ordinary expenses and for profits, 27J per cent,
to the state for the use of its lines, while the remaining 10
per cent, will more than cover the assessments for the
three first funds and the interest paid the companies on
the value of their rolling stock ; the balance, whatever it
is, goes to the fund for property increase. Any excess of
gross receipts above the minimum shall be divided as
follows: Property increase fund, 15 per cent.; renewal of
rails and rolling stock, ^ per cent, each ; state, 28 per
cent. ; company, 56 per cent. But as soon as the gross
return of either company shall be $10,000,000 above the
assumed minimum, the company shall receive but 50 per
cent, of any further increase, while 6 per cent, shall be
applied to such reductions of rates as the government
may indicate. And it is further provided that if either
company shall find itself in position to declare a dividend
of more than 7J per cent., half of any such excess shall go
to the government.

At this distance it is almost impossible to pass judg-
ment on proposals of this kind. The great danger in
any arrangement by which the operating company obtains
a determined share of the gross receipts is that the com-
pany has a great deal more interest in limiting expendi-
ture than in developing traffic. It gets the whole benefit
of any reduction in expenses and only a part of the benefit
of any increase in traffic. It is therefore under constant
temptation to do two things, both of which are bad for
the public : i, to prefer a small traffic at high rates to a
large traffic at low rates ; 2, to limit as much as possible
the expenditure for renewals and permanent improve-
ments or to shift the burden of all such improvements on

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RAILROAD LEGISLATION IN ITALY. 235

the owner. The first of these dangers is not provided
agrainst by the proposed law. Perhaps it is thought that
the Italian Government exercises sufficient power over the
tariffs to prevent any such danger. This seems like a
mistake. It can prevent any increase in rates, but cannot
ordinarily enforce any diminution. But in a growing and
active railroad system, the charges ought naturally to
diminish. With regard to the second point, the safeguards
are carefully planned. The only possible questions are
whether the income of the companies will keep the prop-
erty-increase fund at a proper level, and whether the
assessments have been placed at the right figures. If any
mistakes have been made here, it certainly is not for want
of care or study, and we shall look with interest to see
how far the event justifies the expectation of the framers
of the bill. For if it should be possible to evade the most
difficult questions of construction account by a closely
calculated system of reserve fund, the example of Italy
would probably be followed elsewhere. But in a matter
which is liable to so many disturbing causes as the con-
struction account, any very brilliant success seems too
much to hope for.

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CHAPTER XIII.

RESULTS OF STATE RAILROAD MANAGEMENT.

Extension of government activity — Motives which have led to it — Principles
upon which government enterprises may be managed — Tolls vs. Profits
— German attempts to base rates upon cost of service — Failure to cany
out the principle completely — Local discriminations — The sliding scale
— International conflicts — Pools — Rates based on cost of service are
almost necessarily high — General arguments for and against government
management — The telegraph question in the United States to-day — The
railroad question in the future.

Adolph Wagner : " Finanzwissenschaft." Fttnfter Hauptabschnitt : Com-
munications- und Transportwesen, etc. 3d ed., Leipzig, 1883, pp. 640-792
(3d ed., pp. 525-675, also published separately).

Emil Sax : " Die Eisenbahnen,*' Vienna, 1879, pp. 139-264 ; 404-464.

W.S.Jevons: *< The Railways and the State." ("Essays and Addresses,"
1874 ; " Methods of Social Reform," London, 1883.)

There can be no question that the sphere of government
activity has in the last fifty years been rapidly widening.
The postal service has increased twenty-fold, and has
absorbed no small part of the express business. Outside
of the United States, governments have generally taken
charge of the telegraph. The tendency toward govern-
ment railroad management has been less universal, but
scarcely less noticeable. Twenty years ago, government
ownership of railroads was the exception, even in Central
Europe. To-day, it is far different. The movement which
carried Prussia and Belgium into a virtually complete
system of state ownership, was not without its effects
elsewhere. We have seen how it was to a certain extent

236

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RESULTS OF STATE MANAGEMENT 237

felt in France, in Austria, and in Italy. It was a necessary
part of the general movement in European history by
which national life and national unity were intensified ; a
movement which showed itself on an entirely different
side, in the almost universal attempt to extend the pro-
tective tariff system. Both these movements, and others
like them, were the outgrowth of the spirit which had de-
veloped in the great national wars between Italy and
Austria, Germany and France, Russia and Turkey. Eng-
land alone among the great powers remained unmoved
either to war, to protection, or to state railroads.

It is not generally known how nearly alone England
and the United States stand in depending upon private
enterprise for their railroads. Other countries have either
gone to the extreme of state ownership, or have at any
rate adopted a well-marked system of state support and
control. The smaller or less populous states have, as a
rule, adopted the former policy, the large states the latter.
This is not merely true of Europe (where Switzerland
forms the only well-defined exception), but of the world
as a whole. In general, the South American states own
their railroads ; Brazil owns but a small part of hers, sub-
sidizing most of the remainder. State ownership is uni-
versal in Australia ; in India and in British America, it is
the exception ; but state subsidy is the rule in India, and is
not infrequent in Canada. In Europe, besides the states
whose history has been given in detail, state ownership is
exemplified in Denmark, Sweden, Norway, and, to a con-
siderable extent, in Holland — not to speak of the smaller
states of Germany. The policy of support and control is
seen in Spain and Portugal, and, above all, in Russia ; for
in Russia the state has furnished a large part of the capital
actually invested, and yet has very little actual ownership
to show for it.

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238 RAILROAD TRANSPORTATION,

The motives which have led governments to extend the
sphere of their business activity, have been three :

1. To increase their own political influence.

2. To make up for the lack of private enterprise.

3. To avoid the abuses incident to private management.
The last consideration, which is the main point in the

United States to-day, has played but a subordinate part
elsewhere.

The desire to extend political influence — military, civil,
or financial — has usually been the chief motive. Military
power has been the leading aim of most government
transportation systems, from the Appian Way of Rome to
the Trans-Caspian Railroad which Russia is building out
into the deserts of Central Asia. It is the desire for cen-
tralized power that underlies Bismarck's railroad schemes.
It was with this aim that Louis XL, of France, estab-
lished the first national post-office four hundred years ago ;
it was as a means of taxation that his successors and their
imitators in other countries chiefly used it for more than
three centuries after him.

The wish to make up for the lack of private enterprise
has often been the motive which induced government to
take up an industry in its early stages. This was the case
with canals; it was the case with telegraphs. It was,
perhaps, still more noticeably the case with railroads
which were felt to be necessary to national development.
Sometimes recourse was had to subsidies or guarantees of
interest ; sometimes the state undertook to construct rail-
roads on its own account. Every civilized country, with
the possible exception of England,' has felt this necessity,
and has had recourse either to subsidies or to state owner-
ship. Even in the United States we have had our periods

^ England has given subsidies to Irish lines.

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RESULTS OF STATE MANAGEMENT 239

of reckless land-grants and equally reckless municipal
subscriptions, not to speak of the experiments made at
the very outset by the individual States in railroad man-
agement, and by the National Government in telegraphy.

To-day we do not feel the force of these motives.
Private enterprise in investing capital is too great, rather
than too small. The political influence of our administra-
tion needs to be checked rather than extended. What
we do feel is the set of abuses involved in the present
system of private management; and those who desire
government management of telegraphs or railroads, do so
in the hope that it would be a means to check those abuses.

There is no inherent reason why the rates of govern-
ment railroads should be differently arranged from those of
private railroads. It is not only perfectly conceivable that
the two should be managed upon the same principles, but
in a great many instances it actually happens. Where a
" mixed system" of competing state and private lines
really flourishes, this is almost always the case. The
state railroads of Belgium and Germany fifteen or twenty
years ago were simply ordinary roads whose revenue
accrued to the state. As far as their relations to the
shippers were concerned, they were run to make money ;
not with a view to any general considerations of public
policy. This was inevitable. The tax-payers will not
allow a government to lose money or make small profits
on its lines when a competing private road is making
larger profits. If the latter is run to make as much
money as possible, the former must also necessarily follow
its example, and — perhaps in a somewhat disguised form
— charge what traffic will bear. This constitutes at once
the advantage and the disadvantage of the mixed system.
It insures that the state roads will be managed on busi'

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240 RAILROAD TRANSPORTATION.

ness principles. But it does not l^ve the government
free to manage them with a view to broader principles of
public policy, right or wrong. This was probably the
great reason why the governments of Belgium and
Prussia found the competition of private roads intoler-
able. It did not interfere with their profits ; it did in-
terfere with the freedom of government action.

When the state has its hands free, it has its choice of
several aims, instead of being restricted to the mere
attempt to make good business profits. A government
enterprise maybe managed on anyone of four principles:
I. As a tax. 2. For business profits. 3. To pay ex-
penses. 4. For public service, without much regard to
the question of expense.

Under the first principle, a government enterprise
charges more than would be charged by private bu^ness.
We have few examples of the sort in America. In
Europe they are common enough, in the form of govern-
ment monopolies of tobacco, salt, etc. ; taken up, not on
account of any business needs, but as a convenient means
of taxing the people heavily.

Under the second principle, a government undertaking
is managed on the same system as any private enterprise
— to make all the money it can. As already indicated,
this is regularly the case in those branches of industry
where government comes into competition with private
concerns ; for instance, in the mixed system of railroads,
or in the parcels post as a competitor with the express
companies. If there is no such competition, but a gov-
ernment monopoly, this second principle cannot, in the
nature of things, be applied. When a government mo-
nopoly undertakes to make all the money it can, what it
gets is not business profit but a tax.

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RESULTS OF STATE MANAGEMENT. 24^

The third principle is the system of tolls, or rates based
upon cost of service. On the whole, it is the general prin-
ciple upon which the industrial enterprises of government
are run. The aim may be to cover expenses either with
or without counting interest. The interest account is not
usually included in considering the cost of the post office;
the item is so small that it is possible to neglect it. In
most European postal services, and especially in that of
England, they aim to do something more than cover
operating expenses. In the United States they regularly
do somewhat less. In enterprises involving a larger capi-
tal expenditure, they aim to cover interest also. This is
the case in government telegraph and railroad service, in
light-house and hospital taxes on shipping, and in a variety
of other cases.

The great mass of government activity is not industrial,
and does not seek to pay expenses. It is organized for
public service without regard to strictly business con-
siderations. Under this head come the administration of
justice, and police service, with the activity of the govern-
ment in matters of education and health. They cannot
pay for themselves, and have to be paid for by taxation.

It is obvious that neither the first nor the last of these
principles is a fit guide for state railroad management.
We cannot make them either a means of taxation or a
means of gratuitous service. The former would constitute
a tax on commerce as such — a thing to be avoided. The
latter would constitute a tax on the community for the
sake of commerce — a thing also to be avoided if possible.*

' The latter alternative is not always avoided. A subsidy in almost any
possible form is a tax on the general community for the sake of commerce
which could otherwise not exist. If repaid at all, it is repaid indirectly.
Another instance of the same kind occurs frequently in the United States
postal service. There are a great many mail routes which are necessarily

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242 RAILROAD TRANSPORTATION.

The choice then lies between the second and third of
these principles. It is a question of profits vs. tolls. And
the two different answers to this question mark two differ-
ent phases of the state railroad system. The first answer
— management for profit — ^was the earlier one. It was
given, in general, whenever there was competition on
tolerably equal terms between state and private roads. It
prevailed in Belgium till 1870, in Prussia till 1875 ; in
Austria it still prevails to a great extent. When roads are
managed on this principle, we usually have the same sys-
tem of rates which we find on private roads ; a system of
classification, differential rates, and special contracts. In
other words, there is no serious pretence of basing differ-
ences in charge upon differences in cost of service.

Under the system of tolls, on the other hand, this is
made the fundamental principle. The very first schedules
of rates in some countries — Belgfium, for instance — were
constructed with this idea in view. But these early efforts
were extremely crude, and were abandoned about 1850.
It was not until 1867 that there were signs of a return to
this idea. In that year the railroads of the Duchy of
Nassau adopted a tariff avowedly based on cost of service.
Four years later the same attempt was carried out upon a
much larger scale in Alsace-Lorraine, and from those
provinces it spread eastward and northward, and has had
a very considerable influence upon the system of charges
throughout Germany.*

In these provinces it was started without any fixed pur-
pose. During the war of 1870, when Alsace and Lorraine
were occupied by the German armies, the railroads of

unprofitable. To maintain them involves a tax upon somebody — either on
the letter-writers on more frequented routes, or on the general funds of the
community. The latter alternative is the one usually chosen.

* Schrcibcr : " Tarifwesen der Eisenbahnen," Vienna, 1884, pp. 121-171.

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RESULTS OF STATE MANAGEMENT 243

this district were run provisionally by German mili-
tary authorities — the French officials having, of course,
disappeared. Amid the variety of more pressing con-
cerns, the Germans made no attempt to apply a com-
plicated system of rates. They simply established one
mileage unit of charge per hundred pounds ; another per
car-load ; and a third per platform car-load. It was a
crude pro-rata system, with no attempt at classification,
except as, incidentally, the most valuable goods would be
shipped at parcels rates and the less valuable ones at the
car-load rates.

When peace returned the roads remained under the
direct management of the empire. What was to be the
system of charges? The business of the country had
grown up under French classification, and would be
thrown into confusion by applying that of Germany. On
the other hand, the German officials had been trained in the
classification of Germany, and could not successfully
apply that of France. There was a conflict between the
classification suited to the business and the classification
suited to the officials. They compromised by applying
no classification at all — ^just what they had provisionally
been doing in war time. What had been adopted as
a makeshift now became a settled principle.*

This is the so-called " natural system.** It was adopted
in Alsace-Lorraine in 1871 ; by the connecting roads, on
through business to or from these provinces, in 1872; by
Baden in 1873; by Hungary in 1874. The rate on any
class of goods consisted of a fixed charge to cover ter-
minal expenses, independent of distance, plus a rate
per mile to cover movement expenses. For instance, the
tariff of Southwestern Germany, reduced to American

* Schreiber, pp. 153, 154,

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244

RAILROAD TRANSPORTATION,

units, was approximately as follows, per ton of each class
of goods :

Terminal.

Mileage rates.

cents.

cents.

Express • . . .

55

9.00

Parcels ....

44

3.60

Box car :

Half car-load per ton

33

2.70

Whole *•

23

2.25

Platform car :

Half car-load per ton .

33

1.80

Whole "

22

1.35

Coal

33

0.90

This system in its complete form did not extend itself
widely. But it had a decided influence on the rates and
schedules in other parts of Germany. In 1874 Bavaria
adopted a "compromise tariff.** In the years 1875-76
the same change was urged in Prussia; and in the year
1877 the so-called "reform tariff ** of the German Empire
came into being. It differs from the natural system
chiefly in the existence of a slight amount of classifica-
tion, which, in practice, amounts to a good deal. The
classification and mileage rates (exclusive of terminals)
are as follows :

Class,

Express

Parcels

Ai (general rate for half car-loads) .

B (general rate for whole car-loads) .

A2 (grain, lumber, coal, etc., half car-loads)

Special I. (grain, etc., car-loads)

Special II. (lumber, etc. , car-loads) .

Special III. (coal, etc., car-loads)

Cents.
9.0
4.5
3.0
2.5
2.0
1.8

1.4
1.04-0.88

Austria adopted a similar system, but did not go quite
so far toward the cost-of-service principle. The chief
difference was that the German system had equal mileage
rates (except for the terminal), while the Austrian system
was constructed on a sliding scale, the mileage rates for

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jfSSl/lTSOF STATE MANAGEMENT 245

J ij/gfances king less than for short ones. It should

» ujiJerstood that both in Germany and Austria there

art spedai rates which deviate from the general schedule.

In Germany th^X ^^^ rather infrequent, in Austria quite

Such k the system of rates which is on the whole most
characteristic of state railroad management. It was
adopted on two quite distinct grounds, one theoretical,
the other practical. As a matter of theory it was thought
that rates ought to be based on differences in cost of ser-
vice '^or rather, to put it more accurately, that differ-
ences in rates ought to be based upon differences in cost
0/ service. As a matter of practice, it was thought that
it would result in good both to the railroads and the pub-
Jfc. We thus have to consider two distinct questions at
the same time : first, how far the theory was actually
carried out ; and^ second, whether the results were good or
bad.

First, then, were differences in rates actually based
upon differences in cost of service ?

As regards classification — differences in charge on
different kinds of freight — the theory was never com-

* The theory is by no means universally accept cd^ even by those who
favor state manageraent, GusUv Cohn (Engl. Eisenbahnpolitik, iii.^ 65-34)
taJkes tha position that rates can not properly be based upan cost of service ;
and that, ik^r^/or^, the state should own the railroads, because private
agencies can not be trusted to 3.pply the inevitable principle of charging
wh*t the traffic virill bear,

Cohn*s reasoning is abstruse* but extremely able. As long as we stAnd on
purely econcmic ground, it conBrms the conclusions reached in chap. vi. We
^i"e a.t issue only when it comes to the question « Can the state be trusted Co
do better than private agencies ? A German naturally answers, Yes, An
Ajiieri<:an naturally answers, No.

A few of the Lest thinkers agree more or less luUy wiih Cohn. The aigu>
^tte&t of the text 15 directed against the cruder view which generally pre^uls.

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246 KAILROAD TRANSPORTATION.

pletely carried out. Even in Alsace itself, an exception
had to be made in the matter of coal — an exception which,
by special provision, was sometimes extended to other
cheap and necessary articles. A system of rates by which
each article pays its share of the fixed charges would
virtually prohibit the movement of coal. Yet the moment
you abandon this principle you abandon the system of
basing rates upon cost of service.

As regards local discriminations, they carried the prin-
ciple out systematically. Yet even in Germany, where
the results were most complete, they overdid the matter
in such a way as to prevent the theory from being strictly
followed. The theory is this : Each consignment ought
to pay a fixed charge, independent of distance, to cover
terminal expenses, pltts a rate per mile to pay for move-
ment expenses. But if they carried this theory out, it
would injure both the very-short-distance traffic and the
very-long-distance traffic. For the long-distance traffic
the mileage rate heaps up so high as to prevent the sale
of goods in distant markets. For the short-distance traffic
the terminal charge amounts to so much as to make men
and goods either go by horse-power or not go at all. It
prevents the development of a vast and in some respects
easily handled traffic.

The authorities felt the force of these last points, and
in order not to check local business, they made their ter-
minal charges very low — lower than the theory demanded.
But, according to the principle of tolls, if they made one
element of the charge too low, they had to make up else-
where.* This led to a still further increase of the mileage

^ This constitutes a distinction between rates based npon cost of service
and rates based upon what the traffic will bear. In the latter case, they
cannot and do not try to make up for any such losses (see pages 122, 123).
For the evil effects of thus trying to make np deficits, see page 250.

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RESULTS OF STATE MANAGEMENT. 247

rates, and matters all the worse for the long-distance
traffic.

Belgium and Austria felt this difficulty, and adopted
the sliding scale of charges. This was probably good
policy, but it was an abandonment of the principle on
which they pretended to act. It made the middle-distance
traffic pay relatively more profit than the long- or short-
distance. In other words they based rates on what the
traffic would bear, and then adopted an elaborate system of
pulling wool over their own eyes, in order that the schedules
might look as though they were based upon cost of service.

Prussia did not adopt the sliding scale as a principle.*
But down to the year 1880 she did virtually the same
thing in another way. The long-distance traffic
was favored by an elaborate system of special rates for
export, import, or transit trade. They were not, in gen-
eral, contracts with individual shippers ; but each line of
goods had a special tariff of its own, applied equally to all
who engaged in international business. A decided change
was made in 1879-80. Bismarck at that time took up a
more distinctly protective tariff policy. To allow these
favors to foreign trade was virtually to counteract all such
attempts at protection ; for in many cases the increased
import duties were followed by a lowering of railroad
charges which counterbalanced it. To prevent this, the
policy of special rates for international trade was abandoned.

Austria was the nation which suffered most directly
from this change, because so much of her export trade
went into Prussia, or through Prussia to other countries.
This trade could not bear the increase of rates. Some of
the traffic, instead of going northward via Prussia, went
southward via Trieste and the Mediterranean. But there

> Except on special class III. (coal).

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248 RAILROAD TRANSPORTATION.

was a more direct way of evading the trouble. The river
Elbe runs from the Austrian frontier right through the
heart of Prussia to Hamburg. By putting steamers on
the Elbe, Austria obtained a through rail-and-water route
independent of Prussian rail connections. By making
use of the Bavarian railroads (which were not under the
control of Prussia) Austria was also enabled to carry
her products to the Rhine, and thus ship them to Holland,
Belgium, or England. The Prussian roads felt the loss of
their through traffic. The government withdrew from its
extreme position, and attempted a partial compromise
with Austria. This was rejected. They then tried retalia-
tion. They made connections with Danube steamers to
prevent the Austrian roads from getting Prussian traffic.
And thus we had the curious spectacle of a fight of Aus-
trian railroads and Prussian waterways on the one hand,
against Prussian railroads and Austrian waterways on the
other. Each party succeeded in causing the other a good
deal of inconvenience ; but neither party was able to make
foreign traffic pay domestic rates. The question has but
just come to a settlement.

It is clear that even with the whole power of the Euro-
pean governments, the laws of trade have proved too
strong for any arbitrary attempt at railroad regulation to
succeed. The effort to base rates upon cost of service has
only resulted in a compromise. It must be confessed, on
the other hand, that important results have been achieved.
They have done away with the most dangerous forms of
special contract and secret discrimination. The worst
abuses under which we suffer in America have been
avoided; at the sacrifice, however, of many advantc^es
which we enjoy.'

* In the way of rapid development and low through rates.

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RESULTS OF STATE MANAGEMENT, 249

The real principle on which the Prussian system of
railroad charges is based was clearly stated by the govern-
ment in 1879.' ^- The tariff should be clear. 2. It
should be equable. 3. It should not produce bad indi-
rect effects. 4. It should not give opportunities for
official corruption and corrupt favors. This is not basing
rates upon cost of service (unless by a somewhat strained
interpretation of the second heading). It bases them
upon intelligible practical grounds, of which any railroad
man will see the force, even though he may not deem it
possible to apply them to the tariff of his own road.

This effect upon rates can only be secured at the sacri-
fice of every thing like railroad competition, and of any
good which railroad competition may bring in the way of
rapid development or of efficient use.

The governments of Central Europe have given up
trying to procure obedience to these principles by simple
prohibitory laws, such as are occasionally proposed in
Congress. They have a hundred times more police power
than we have, but they do not undertake to do this. To
secure obedience to this system, they must take away the
temptation to violate it. This can only be done by a
system of pooling contracts. These are accordingly legal-
ized and enforced. They are carried on to an extent
undreamed of in America.' They have both traffic pools
and money pools. There are pools between state roads
and private roads, between railroads and water routes. It
is regarded as a perfectly legal thing that one road should
pay another a stated sum of money in consideration of
the fact that the latter abstains from competing for the
through traffic of the former.

' Schreiber, p. 144.

* Sax, pp. 84-96. Schreiber, pp. 235-242.

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250 RAILROAD TRANSPORTATION.

These principles, applied by these means, tend to keep
rates up. The roads do not lower the local rates to any
extent, but rather raise the through ones. They level up
instead of levelling down. They are not occupied with
the question how to lower rates, but how to keep the right
proportion between existing rates. In trying to decide
that matter fairly, they are tempted to put every thing high
enough to leave themselves elbow-room. In their anxiety
to decide what is a fair rate in proportion to other rates, un-
der existing circumstances, they neglect the question, How
can we change circumstances so as to make lower rates ? *

This is an evil inherent in the very nature of tolls.
There was never a more mistaken idea than the idea that
rates would be reduced if they were based upon cost of
service. The principle keeps rates up. If it is strictly
applied, it makes it necessary that each item of business
should pay its share of the fixed charges. A great deal of
business which would pay much less than its share of the
fixed charges (though still giving a slight profit above
train and station expenses) is thus lost. This is bad for
the railroads, bad for the shipper, and bad for the prospect
of low average rates. It makes the business of the roads
so much smaller that the share of fixed charges which
each piece of business has to pay (under this system) be-
comes higher, while the profit does not increase, and the
inducement to new construction is lessened. These thingfs
are not mere theory, but are matters of history. The
great reductions of rates, whether in the United States,
Belgium, or elsewhere, have taken place under the stim-
ulus of competition, even if it was only temporary. They
have been made at the very periods when the principle of
basing rates upon cost of service was most systematically
violated. It is the countries which have passed through

^Railroad Gazette, i88s» p* iXQ»

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J^ESULTS OF STATE MANAGEMENT 2$t

such periods that enjoy the lowest rates. The average
rates on all shipments in Ohio to-day are probably lower
than the German rates for coal for the same average
distance. And, finally, the refusal to allow railroads to be
run for profits prevents the construction of new roads
when they are really needed. If a road with its hands
free could just make a profit, a road forced to base rates
upon cost of service, and thus check the development of
certain lines of trade, could not do so. It would thus
have to go unbuilt, or else receive a subsidy — a dangerous
policy. The effort to base rates on cost of service goes
hand in hand with the policy of subsidies. The money
ultimately comes, or is supposed to come, out of the
pockets of local tax-payers. Nobody else is enough
interested to have the road built. If they are charged
what the traffic will bear, they pay it to the railroad direct.
If they furnish a subsidy, they pay it via the public
treasury. Neither way is very satisfactor>'', but in. the
United States at any rate we have found the second the
worse evil of the two.

To offset these arguments it is urged that the rolling
stock is more fully utilized under the Prussian system, and
that there is less waste of capital, because the new con-
struction is intelligently adapted to the needs of the
country ; and that both of these causes greatly reduce the
cost of railroad service. Neither point is fully made out.
The state roads undoubtedly manage to use a large per-
centage of available car space. It is by no means clear
that they secure the same economy in time. They load
cars quite fully, but they seem to keep them idle a long
time to do it.* In the second point, concerning new con^

' In Belgium the complaints under this head are very serious. Cars lie
waiting for a load at one point, and ftre hot to be had at other points where
they are wanted.

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252 RAILROAD TRANSPORTATION.

stniction, there is much more force ; a force which is never-
theless weakened by two considerations : First, the state is
of necessity slow in appreciating the business importance
(as distinct from the political importance) of new lines,
and thus makes financial mistakes. Second, it is rare that
the state does not have to pay more for a given piece of
work than would be paid by a well-managed private
company.

This brings us to the political dangers of the state rail-
road system. These have been most forcibly felt in Italy,
as detailed in the report of the Investigating Commission.
If we may believe M. le Hardy de Beaulieu, an excellent
authority, the same troubles are making themselves felt in
Belgfium. In Prussia there is little or no complaint. This
is chiefly due to the superb organization of the Prussian
civil service. But the possible dangers — dangers which
would be realized under a less stable government than
that of Prussia — may be inferred from the number of
officials employed in railroad service. Not counting mere
laborers, incidentally employed, the number of Prussian
railroad officials is about 80,000. There is little need
of dwelling upon the evils which would arise from this
cause, were such a system applied in the United States.

To sum up : The arguments advanced by the advocates
of government ownership start from the idea that govern-
ment means of transportation will be managed, not witK
a view to high profits, but for the good of the community.
They will thus, it is said, offer low rates, based upon cost
of service, and equal facilities without discrimination.
The evils of speculation will be avoided. There will be
no waste of capital, no construction of two lines where
but one is needed. Capital will be put where it will do
the most good for the development of the country.

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RESULTS OF STATE MANAGEMENT. 253

Finally, we shall no longer be at the mercy of combina-
tions of capitalists who manipulate and tax us for their
own interests. It is further urged that the post-office
shows how government secures to all men low rates,
equal facilities, and security against extortion ; and it is
claimed that the same result might be secured with a gov-
ernment telegraph, or perhaps with government railroads.

On the other hand, the Italian Commission sums up
the arguments on the other side by saying, first, that it is
a mistake to expect lower rates or better facilities from
government than from private companies. The actual
results are just the reverse. The state is more apt to tax
industry than to foster it ; and when it attempts to tax
industry, it is even less responsible than a private com-
pany. Second, state management is more costly than
private management, and a great deal of capital is thus
wasted. Third, political considerations are brought into
a system of state management in a way which is disastrous
to legitimate business and demoralizing to politics.

These conclusions are of the highest importance ; but
they apply to some forms of industry far more than to
others. Where uniform rates are vastly more important
than low ones, the evils of taxation are lessened. Where
there is no large investment of capital, there is less dan-
ger of waste. Where the business is largely a matter of
routine, the opportunities for political manipulation are
reduced to a minimum.

The conditions which favor state ownership and man-
agement of transportation agencies are thus stated by
Adolph Wagner,* of Berlin, the leader of the German pro-
fessorial socialists: i. When the efficiency of the ser-

* " Finanzwissenschaft/' section 15. See Lalor: "Cyclopfledia of Pol.
Economy/' article " Transportation," p. 931.

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254 RAILROAD TRANSPORTATION.

vice requires uniform and wide extension over the whole
country and international communications (post-office,
telegraph ; somewhat less so in the case of railroads). 2.
When the service involves any thing like a monopoly,
legal or actual (railroads, telegraphs). 3. When it requires
constant repetition of the same services, according to fixed
schedules, in such numbers as to involve the existence of
a large body of officials. 4. When the cost may be less-
ened by combining a variety of services at small stations
(letter and parcels post, railroad stations, and telegraph
offices). 5. When the service in private management can
only be secured by subsidies on a large scale. 6. When it
is necessary on grounds of public policy that the service
should inure uniformly to the benefit of the whole people.
These principles, he concludes, enable us to speak de-
cisively in favor of state management in the case of letter
post and telegraph ; more reservedly in the case of parcels
•post and railways ; in the matter of navigation they justify
it only in exceptional cases.

On the other hand, W. Stanley Jevons,* writing an im-
partial opinion, but, as an Englishman, averse to great
extension of government activity, states the conditions
favorable to state management as follows: " i. When
numberless widespread operations can only be efficiently
connected, united, and co-ordinated in a single, all-exten-
sive government system. 2. When the operations possess
an invariable routine-like character. 3. When they arc
performed under the public eye or for the service of indi-
viduals who will immediately detect or expose any failure
or laxity. 4. Where there is but little capital expendi-
ture, so that each year's revenue and expense account

1 *'On Government Control of Telegraphs/' etc., 1867. In "Methods
of Social Reform," p. 279.

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RESULTS OF STATE MANAGEMENT. 255

shall represent, with sufficient accuracy, the real commer-
cial conditions of the department." Of these principles
the fourth is one of the highest practical importance,
which must be considered in discussing any schemes of
state management ; and one which, under a government
like that of the United States at present, must generally
be decisive.

The question is not to be settled on general theories.
Each case must be decided by itself. The postal service
obviously fulfils the conditions for successful government
management better than other forms of industry. Rail-
roads obviously do not. The telegraph stands midway
between the two. It involves far more capital investment
than the postal service, and far less than railroads. Its
management is less a matter of routine than the postal
service, and more so than railroad service.

If we compare the telegraph service of the United
States, with that of Great Britain or Switzerland — the
two countries of Europe which show the best results from
government telegraphy — there is no doubt that the aver-
age rates with us, length and distance being taken into
account, are less than with them. But for moderate dis-
tances the cost, to a private individual, of sending an
ordinary message is, on the whole, decidedly less in
the more advanced European countries than with us.
Concerning the amount of use which is made of the
telegraph, we find that the number of messages a year,
per ICO inhabitants, with us, is slightly les3 than with
them; the amount of matter sent probably somewhat
greater with us, and the total telegraph service, taking
distance as well as matter into account, very much greater.
We make more use of the telegraph ; but they make more
general use. The results would have been much more de-

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2S6 RAILROAD TRANSPORTATION.

cidedly in our favor had we made the comparison with
other countries than Great Britain or Switzerland.

In promptness and efficiency of service we probably
have a slight advantage, though this point can hardly
be established by argument, and must remain, to some
extent, a matter of individual opinion. In utilizing new
methods we have a distinct advantage. Witness the ob-
stacles to the introduction of the telephone in Great
Britain. On the other hand, any such interruption to
the service as was occasioned by our telegraphers* strike
in 1883 would have been impossible in Europe.

The industrial results balance so closely that the ques-
tion must be decided on political grounds. Government
ownership of the telegraph would have one great advan-
tage : it would emancipate us from the control of an
organization which now has dangerous power, and whose
methods have not been in all respects above suspicion.
On the other hand, we should increase government
patronage, in itself a great evil ; we should have a demor-
alizing item of expense in our budgets, compared with
which star routes or river and harbor improvements
might sink into insignificance ; we should run the risk of
having facilities granted and capital invested, not because
business needed them, but because they were demanded
by doubtful states or influential members of Congress.
We should place in the hands of our government an agency
which, especially in the present critical conditionof our civil
service, might readily be used to control political action.
Some of the evils which have recently turned men's minds
to the thought of a government telegraph, would probably
be increased rather than lessened by the change.'

> In the discussions on the subject twelve years ago, the best arguments
were those of Wm. Orton and D. A. Wells against government ovmership

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RESULTS OF STATE MANAGEMENT. 2$/

Government ownership of the telegraph prevailed in
Continental Europe, because each country was more or
less of a bureaucracy ; that is, the civil service governed
the country, and was so well organized that it extended
itself as a matter of course. In America the civil service
is not so well organized, does not govern the country, and
is not allowed to extend itself as a matter of course.
Political reasons decided the question in favor of a govern-
ment telegraph in Europe, Political reasons form the
main ground against a government telegraph in the
United States.

The present importance of the telegraph question in
America has thrust the question of state railroad owner-
ship into the background. Every now and then some one
demands that the government should have a means of
controlling railroad charges, either by a system of water
routes or by the ownership of a few among many com-
peting railroads. Neither of these would meet the real
evils. It is not general charges that need regulating, but
special differences. If you have a water route or compet-
ing railroad, you will protect those whose doors it passes,
and create differences in their favor against those who are
not thus situated.

The idea of government ownership of one among sev-
eral competing lines attracted undue attention, owing to
its supposed success in Belgium. The earlier reports of
the Massachusetts Commission — deservedly high authori-

(Proc. of the Com. on Approp. on the Postal Telegraph, 42 Cong. 3., H. R.
Mis. Doc. 73). Of the more recent discussion, some of the most important
articles are: Hubbard (for government telegraph), North Amer, Rev,, 137,
pp. 521-535 ; Green (against government tel^jraph), North Amer, Rev,, 137,
pp. 429-434 ; Means (against government telegraph on broader grounds),
North Amer. Rev,, 139, pp. 51-66. The best comparative statistics are in
United SUtes Census, z88o, vol. iv., gen. folios 805-849.

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258 RAILROAD TRANSPORTATIOlf,

ty— favored the idea. But it was never carried to a suc-
cessful conclusion in Massachusetts; and it was aban«
doned in Belgium, the government purchasing a large part
of the private railroads. The competition with private
lines had been too onerous for the Belgian Government,
and had left it too little independence of action. The pri-
vate lines regulated those of the government rather more
than the government regulated the private lines. Experi-
ence is against the probability of success in the attempt
on the part of government to regulate either railroads or
telegraphs in this way. To do anything efficient, it must
control not a few lines, but the whole system.

There is a strong popular feeling, to a large extent
unsuspected by those in authority, in favor of government
ownership of railroads as a system. No one can have
much to do with the more thoughtful workingmen with-
out finding how strong that feeling is, and what hopes are
based upon it. The fact that the question is not now
under discussion must not blind us to the fact that forces
are at work which may prove all but revolutionary when
the question actually does come under discussion. If
it be true that government railroad ownership would be a
most serious political misfortune for the United States,
we must be prepared to meet the danger with our eyes
open. Unless we are able to face it intelligently, and to
show reason for our action, the widespread feeling in its
favor will prove too strong for us. It may not come
for many years; but the lessons of the Granger move-
ment show plainly enough what forces will lie behind it
when it does come.

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APPENDIX I.

KAILROADS OP THE WORLD, JANUARY I, 1884.

MUes.

Capital invested.

Per mite.

America

Europe

Asia ... .

Africa ....

AttstnOia

140,000

114.000

11.600

3.400

6.500

$8,400,000,000

13,110,000,000

775,000,000

240,000,000

325,000,000

$60,000

115,000

66,000

70.000

50.000

275,500

$22,850,000,000

$83,000

The figures of cost commonly quoted are those of the French
Bulletin des Travaux Publics. They are in almost every case
too high. Neumann-Spallart " Uebersichten 1881-2," (1884)
pp. 437, 438, makes the necessary corrections for Europe,
but has not done the same for Asia and Australia. The figures
for Africa are very uncertain.

The special tables are based partly on the Archvufiir Eisen-
bahmvesen^ Jan., 1885, and partly on the investigations of Neu-
mann-Spailart ; but neither authority has been followed in
every detail.

It has been almost impossible to obtain train-mileage and
ton-mileage statistics with the completeness which is necessary
for detailed comparison.

In comparing the figures for the United States with those
for other countries, it should be remembered that our rolling
stock is much heavier and larger than theirs, so that a direct
comparison of the equipment figures does us injustice. It
must also be borne in mind that the average distance over

259

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26o

RAILROAD TRANSPORTATION,

which each passenger or ton is moved is far greater in the
United States than in Europe.

Length,
Jan. ,. 1884.

Per cent.

Billet of

Miles of
road to

Cost per

increase in
5 yean.

road to zoo
sq. miles.

zo,ooo
inhAb.

mile.
DoUars.

Gennany .

22,300

8

10.6

4.9

105,000

Gr. Britain and Ireland

18,600

5

15.2

5.3

204,000

France

t8,50o

18

9-

4.9

128,000

Rnsiia

15.700

7

0.8

1.9

80,000

Austria and Hungary .

12,800

12

5.3

3.4

105,000

Italy ....

5.900

13

5.'

2.

92,000

Spa&i. . . .

5,100

16

9.6

3.

78.000

Sweden

4,000

14

a.3

8.7

30,000

Belgium .

2,600

6

23.2

4.8

132,000

British India

10,500

20

0.7

0.4

66,000

United States .

120,000

43

3.4

22.5

61,000

Equipment per xoo miles.

Pass.

Tons

moved
(miUions).

moved
(mUlions).

Locom.

Pass. cars.

Freiglit

Germany .

1882

51

95

1,081

224

198

Great Britain .

1882

76

232

2,298

655

291

France

1881

46

105

1,207

180

93

Russia

1881

40

50

775

33

14

Austria

1882

30

62

716

47

70

Italy

1882

29

88

510

34

11

Spain

1880

26

77

468

15

9

Sweden

1881

16

36

401

7

5

Belgium

1881

7a

139

1,840

57

37

British India .

1883

24

65

436

65

19

United States .

1883

22

21

663

313

400

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APPENDIX II.

THEORY OF RAILROAD RATES.*

The difficulty with most theories of railroad rates is that
they are not based on actual practice, but upon somebody's
preconceived notions of what that practice ought to be.

The practical railroad manager has one general principle in
this matter. He lowers rates whenever he thinks it will in-
crease net earnings — in other words, as long as it will increase
gross earnings faster than it increases operating expenses.
Any theory which shall correctly represent American railroad
practice, must be based on this principle.

The first thing to be noticed is that it has the form of a dif-
ferential equation. The manager lowers rates until the differ-
ential of the gross earnings on a particular line of traffic
ceases to be greater than (/. ^., becomes equal to) the differen-
tial of the operating expenses. Let us analyze this equation
into its elements.

The rate is the independent variable. The volume of traffic
is a function of the rate ; as the rate diminishes, the volume
usually increases and never diminishes. Let x = the rate per
car-load for a particular class of goods between two given
points, and y = the number of car-loads obtained at that rate.
The successive values of y corresponding to successive reduc-
tions of X will form a traffic curve whose general form is shown
on the following page.

' This is simply carrying out in detail the principles laid down on pages
109, no. It differs in form from the analysis of Lardner, of De La Gour-
nerie, or of the Italian Commission.

261

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262

RAILROAD TRANSPORTATION.

(tPP'f is the traffic curve. A rate Ox gives a volume of
traffic of xP car-loads ; a reduction of the car-load rate to
Ox' increases the number of car-loads to x^P'. The special
circumstances which aflfect the form of the curve for different
lines of traffic will be discussed later.)

The rectangle OP = ^ = the rate per car-load multiplied by
the number of car-loads obtained, obviously represents the
gross earnings from this particular branch of traffic.

Now let c = the expense of hauling each additional car-load.
In the long run this will vary a good deal, but for a particular
branch of business at a particular time, it will have a tolerably
determined average value, which may be treated as constant.
What constitutes this additional expense is not easy to de-
termine on general principles. In the long run it would in-
elude a full share of train and station service accounts, a large
share of car maintenance, and a moderate share of track main-
tenance and general expenses. It is the special expense of each
particular piece of work as distinct from the general expenses
of running the railroad as a whole.

Then cy^ (the rectangle 0C\ will represent the special ex-
pense of handling^ car-loads ; and {x — €)yy (the rectangle cP)^
will represent the profit in the widest sense ; /. ^., the share
which this particular line of business can contribute toward

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APPENDIX. 263

the general expenses and dividends. It is this rectangle
which the manager tries to make as large as possible in each
particular case. The question is, How will a reduction in rates
affect this rectangle ? Let a reduction be made to ;r', increas-
ing the volume of traffic to y, the gross earnings to OP* and
the expenses to OC, The increase in gross earnings ^^yP —
x!F = x! Ay — y A x. The increase in operating expenses = yC^
= cAy. At the point where the former ceases to exceed the
latter, the differentials must be equal. Then xdy — ydx = cdy ;
or (x — c) dy ^=z ydx} The same result might have been ob-
tained in another way. The rectangle cP -=: (x — c) y. The
railroad manager wishes to make this a maximum. Its first
differential must therefore equal zero. Then (x — c) dy — ydx
= o ; or (jc — c) dy -=■ ydx.

We thus have an exact mathematical statement of the
principle from which we started ; and more than that, we have
it in a form which shows the relation of the different elements
involved. We have a general theory based on a recognized
practice ; it only remains to consider how this theory works in
special cases.

I. Rates as affected by conditions of traffic. The traffic curve
is to a large extent independent of the action of the railroad
manager. It depends upon general business conditions ; the
railroad manager tries to put his rates at such a point as to
make the most under those conditions.

Each class of articles has a curve of its own. The form of
the lower (right hand) end of the curve depends mainly upon
the value of the article. On cheap articles a high rate would
stop nearly all shipments ; that is, this end of the curve soon
approaches the axis of X. On articles of high value, on the
other hand, the rates may be placed quite high without stop-
ping shipments ; the curve for these extends far to the right.

'For convenience of illustration, the differentials themselves are all
treatied as positive. Due allowance for this is made in the signs of the
terms.

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264 RAILROAD TRANSPORTATION.

For competitive business the curve is very much like that for
cheap articles ; a rate much above cost is sure to destroy the
business, because it will go by some other route.

The upper end of the curve does not depend so much upon
value as upon expanstveness of supply and demand. Where
either of these is limited, the curve soon approaches the axis
of Y. Where they both expand readily, the curve runs up al-
most perpendicularly. An inspection of the figure is sufficient
to show why such traffic best lends itself to reduction in rates.
The traffic in food, fuel, and other articles of common use fur-
nishes the best examples of this ; but it is generally true of the
long-distance traffic, by which new sources of supply are de-
veloped.

Thus the possibility of charging high rates depends mainly
on the value of the articles ; but the profitableness of making
large reductions depends on the expansiveness of the traffic.
If reductions are made on traffic which does not expand, some-
body else besides the railroad gets the whole benefit. Where
the supply can expand, but the demand does not, the benefit
goes to the consumers. This is the case in general reductions
of rates on manufactured articles where there is no pool. If
the demand can expand more readily than the supply, the re-
duction in rates goes into the pocket of the producers or mid-
dlemen. This is the case in the milk traffic.

2. Rates as affected by cost of service. Any thing which
diminishes the expense of handling additional traffic makes
it advantageous to reduce rates lower than would otherwise
be the case. For if, previously, xdy — ydx'=.cdy^ any thing
which diminishes c without changing general business condi-
tions will make xdy — ydx > cdy j that is, it will place us at a
point where further reductions in rates increase gross earnings
faster than they increase operating expenses. It is for this
reason that rates bctsed upon what the traffic will bear^ in many
instances seem to be bctsed upon cost of service.

We have thus far confined our consideration of cost of ser-

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APPENDIX, 265

vice to operating expenses in the narrowest sense of the word.
It is now pretty well understood that fixed charges do not
directly affect rates ; nor do dividends affect them, except in so
far as a road which is paying very high dividends may reduce
rates lower than it otherwise would, in order not to tempt new
capital into the field. But while fixed charges are not taken
into account in making rates, ih^ prospective traffic and rates
are (or ought to be) taken into account before incurring fixed
charges. The practical question of chief importance is.
How far is it worthwhile to increase fixed charges for the
sake of reducing operating expenses ? To the formulation of
this problem our mathematical analysis readily lends itself ;
but as it is simply a restatement of old and well-recognized
results, it is unnecessary to carry the matter out in detail.

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INDEX.

Absentee ownership, 21, 133

Accidents, 128

Accmints, 56-62

Adams, C. F., Jr., 82, 136, z66

Alsace, ao6, 207, 243

Austria, 18, 208-210, 844-248

Back-loading, 107, 108

Balanoe-theet. 57-60

Baltimore and Ohio R. R., i, 39-34»

94
Buikrupt competition, 53, 71-74,

123
Belgium, 2l»-2i8, 247
Blanchard, G. R., 82
Bonds, 52, 53, 148, 156
Borrowing power, 54, 149

Canals, 29-32, 164, 165 (see Erie
Canal)

Capital investment, 40-43, loi, 148,
149, 259. 260

Cars, 106 ; English, 150

Charters, English, ix, 12, 46, 164-
167 ; for limited periods, 218

Chicago roads, 86, 91

Classification, 112-114, 245 ; Bel-
gian, 216 ; German, 244

Clearing-house, 89; English, 159-162

Coal combination, 68

Combination. 65, 68, 74--8i, 82-99 ;
in England, 151, 158, 159, 168

Commercial crises, 48-56, 167, 168

Commissions, State, 135-140 ; Na-
tional, Z41-145; English, X70-177,
182-184

Competition, 40, 63-69, 129, z66,
167, 214-217

Competitive rates, 71, 142, 143

Congressional l^;islation, 140-145

Consolidation, 12, 13,83-87, 158,168

Constrnction account, 60-62, 233-

235
Construction companies, 52, 2zx
Coolejr, T. M., 8x, 07
Cooperative freight unes, 88-90
Corporate ownership, 42-48
Cost of railroads, zoi, 102 ; English,

155; comparative statistics, 260
Cost of service, no, 112, 129, 130,

184, 240-246, 249-351
Crisb of 1884, 50-56

Differentials, 95-98
Discrimination, 20, 21, loi, 102, 108-

125, 132, 133. I4a» 143. 842. 247;

in England, z8o-i86; in Germany,

246-^8
Diversion of freight, 76
Dividends, sum available for, 58, 61 ;

limitation of, 101-103, 126, 179

England, 3, 4, 146-186

Equipment, statbtics of, 260

Ene Canal, 12, 29-32, 98

Erie Railwajr, 35* 85. 86, 86, 90, 94

European railroad statistics, 260

Eveners, 95

Expenses, 56-61, 105-108, xio, 142,

143, 217, 233, 234
Express companies, 87, 149, 150

Fast^freight lines, 87-90
Fink, Albert, 82, 93, 96, 100
Fixed chaiges, 70-74, 265
Floating debt, 57^ 61
Foreclosure, 53
France. 3, 1 87-202
Free passes, Z09

General railroad law, 125
Germany, 203-208, 239-252

267

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268

RAILROAD TRANSPORTATION.

GoTemment control, 2a» 125-145,
900, 20Z ; ownership, 189, 195,
Z96, 205-208, 211-220, 225-231,
236-255, 258 ; ownership of tele-
graph, 255-257

Granger cases, 42 ; movement, 130-
136

Hepbam Committee, 82, 96

Insolvent roads, 53, 71, 74
Internal improvements, 27
Inter-State commerce, 140-145
Iowa Commission, 131, 132, 139
Italy, 219-235

Joint executive committee, 96
oint-stock ownership, 44-48

Labor combinations, 78, 128
Land grants, 37, 38
Liability, 43, 127, 128
Limitation of construction, 54 ; of

profits, 55, 102, 126, 156, 179
Local discrimination, Z14-119, 122,

132, 137, 138, Z41, 142, 246-248
Locomotives, zo, 33, Z07

Massachusetts railroads, 35 ; Com-
mission, 56, 62, 136-139, 215

Maximum rates, 129, 134, 178, 179

Military railroads, 15

Mississippi River, 28, 29, 93, 96,
98 ; valley, railroads in, 36, 38

Monopoly, 63-69, 77, 191, 192, 200,
204, 240

National commission, 141-145
New York Central, 35, 83, 93-99,

103, 121, 129
New York, commerce of, 94
New York State, Assembly Com.
(1879), 82, 96 ; early railroad his-
tory, 35

Pacific railroads, 38, 39
Parallel roads, 53, 54
Passenger business, 109
Passes, 109

Pennsvlvania, canals, 31 ; early rail-
roads, 32, 34
Pennsylvania R. R., 84, 85, 93

Personal discrimination, 20, ziz,

Z19-123, 182, Z83
Political influence, 229, 238, 252, 256
Pools, causes and forms of, 74-76 ;
in America, 91-97, Z43, Z44; in
Europe, 81, 15Z, Z59, 216, 249
Post-office, 3, 5, 6, 24Z, 254, 255
Profits, 77, Z01-104 ; in France, 199
Pro-rata law, 129, Z31
Prussia, 204-208, 247-249, 25 z, 252
Publicity of management, Z38

Rails, Z7, 33, Z05, Z06

Rates, Chicago-N. Y., 93 ; Chica-
go-Liverpool, 98 ; competitive,
71, 239; in Belgium, 2Z5, 216;
in England, 157, 158; in France,
201, 202 ; in Germany, 242-251 ;
on government railroads, 229,
241, 245, 253 : in the U. S.,
reduction in, 104-108 ; to develop
busines, 16, Z7 ; reasonable, 131-
Z34; theory of, Z09, ziz, 245f
246, 250, 261-265

Reagan bill, Z40, 141

** Reasonable" rates, Z19, Z3Z, Z34,
144

Rebates, Z19, 120, 185
Receivers, 53, 71
Regulation, right of, 4Z, 42, 140
Roads, 2, 3, 24-28
Russia, 2Z8, 237

Scott, Thomas A, 84. 85

Seaboard cities, 94-98

Secrecy of mtes, 119, Z20, 183

Shipping, 4, 7, 45

Short-haul principle, Z40-Z42, Z83

Sleeping cars, 87

Socialism, 79, 80, 258

Southern railroads, 34, 35, 87;
Railway & S. S. Association, 92,
93 ; State l^slation, Z36

Special rates, Z19, Z2i, 182, iiZ4

Speculation, Z9, 48-56, 99, Z49, 167
194, 205, 21 z

Standard Oil Co. , 67, 95, Z2Z

State control, 22, Z29-145, 200, 201 ;
ownership, 34, Z89, Z95, Z96, 205,
208, 2ZZ, 2z8, 219, 225-23Z, 236-
258 ; ownership of tel^^ph, 25 5«-
257

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INDEX,

269

Statistics, comparative, 154, 259, 260
Steamships, 8, 9, 64, 68, 69
Steel rails, 105, 106
Stephenson, George, 10, 66
Sterne, Simon, 97, 100
Stock- watering, 54, 55, 102. 122, 155
Strikes, 128

Subsidies, 26, 31, 34-38> 188, 190,
204, 209, 220, 241, 251

Taxation, 126, 127, 241
Td^jraph, 6, 7, 236, 254-258
Through business, 87, 93, 202
Transcontinental railroads, 39, 86
Transportation companies, 87, 88

Trunk-line systems,

93-97
Turnpikes, 25-28

4, 85 ; pools,

Vanderbilt system, 83-85

Wars of rates, 93-99i XT4f 8Z4> 248
Water in stock, 54, 55, loi, 102,
Water routes, 28-32; competition

with, 93-98, 180, 181, 214, 248
** West Shore," 86, 99, 103
What the traffic will bear. 17, 76,

III, 123, 124, 245-247, 263, 264
Wisconsin legislation, 135

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